Are you on the hunt for the next breakout star in the stock market? It might just be lurking within small-cap stocks. These smaller companies often fly under the radar of many investors. One effective way to tap into this dynamic segment of the market is by investing in a small-cap ETF.

A small-cap ETF is an exchange-traded fund that focuses on investing in small-capitalization, or small-cap, stocks—essentially the market’s smallest companies. Investing in a small-cap ETF allows you to easily access a broad range of these smaller companies rather than individually researching and selecting stocks.

While “small-cap” may sound diminutive, these companies typically have market capitalizations ranging from a few hundred million to a few billion dollars. This size is considered small relative to larger companies, which can reach market caps in the trillions.

Investors are drawn to small caps because they often offer greater potential for growth compared to large-cap stocks, commonly represented by indices like the S&P 500. However, due to their size and financial resources, small caps also tend to be riskier and more volatile.

Given these risks, investing directly in individual small-cap stocks is generally more suited to experienced investors. For newer investors, a small-cap ETF provides a diversified approach to investing in these potentially high-growth companies while mitigating the risks associated with individual stock selection.

Here are the top small-cap funds based on the following criteria:

  • U.S. funds listed in ETF.com’s small-cap screener
  • Funds that have been top performers over the last five years
  • Performance as of June 28, 2024, using the latest data from ETF.com

This ETF tracks the S&P SmallCap 600 Revenue-Weighted Index, which adjusts the weights of stocks in the S&P SmallCap 600 based on their revenue.

  • Year-to-date (YTD) performance in 2024: -3.4 percent
  • Historical performance (annual over 5 years): 15.3 percent
  • Expense ratio: 0.39 percent

This ETF comprises the top 100 stocks from the S&P SmallCap 600, selected based on their free cash flow yield.

  • Year-to-date (YTD) performance in 2024: -9.9 percent
  • Historical performance (annual over 5 years): 14.6 percent
  • Expense ratio: 0.59 percent

This ETF follows the S&P 600 High Momentum Value Index, which consists of 120 stocks selected for their strong momentum and value metrics.

  • Year-to-date (YTD) performance in 2024: -3.6 percent
  • Historical performance (annual over 5 years): 14.2 percent
  • Expense ratio: 0.36 percent

This fund tracks the S&P SmallCap 600 Pure Value Index, which focuses on stocks with strong value metrics like price-to-earnings ratio and book-value-to-price ratio.

  • Year-to-date (YTD) performance in 2024: -7.7 percent
  • Historical performance (annual over 5 years): 11.2 percent
  • Expense ratio: 0.35 percent

This ETF tracks the S&P SmallCap 600 Momentum Index, comprising 120 stocks from the S&P SmallCap 600 with the highest momentum scores.

  • Year-to-date (YTD) performance in 2024: 5.4 percent
  • Historical performance (annual over 5 years): 11.0 percent
  • Expense ratio: 0.39 percent

This ETF follows the O’Shares U.S. Small-Cap Quality Dividend Index, focusing on stocks with low volatility, dividend growth, and strong fundamentals.

  • 2024 YTD performance: 5.4 percent
  • Historical performance (annual over 5 years): 10.7 percent
  • Expense ratio: 0.48 percent

This ETF tracks stocks in the Dorsey Wright SmallCap Technical Leaders Index, focusing on stocks with robust momentum.

  • 2024 YTD performance: 1.2 percent
  • Historical performance (annual over 5 years): 10.6 percent
  • Expense ratio: 0.60 percent

Investing in small-cap ETFs can offer attractive returns if bought at reasonable prices, but there are considerations to keep in mind.

Small-cap ETFs provide access to a diversified portfolio of smaller companies at a relatively low cost, sparing investors from the need for extensive individual company research. They can quickly enhance exposure to the small-cap segment within a broader portfolio, potentially benefiting from the growth trajectory of these companies, many of which may evolve into larger, more successful firms.

However, one drawback is that as successful small companies grow and graduate to larger categories, ETFs may need to sell them to adhere to their investment mandates. This turnover can affect the fund’s performance. Additionally, small-cap ETFs lack the broad diversification of other funds, exposing investors to greater volatility and risk. Economic downturns can disproportionately impact smaller companies, potentially affecting returns. Thus, while small-cap ETFs can offer growth opportunities, they also require careful consideration of risks and market dynamics.

Investing in small-cap ETFs offers an appealing avenue to access some of the market’s fastest-growing companies at a low cost, mitigating the risks associated with individual stock purchases. However, like all stock market investments, they do come with inherent risks and potential drawbacks.