3 ETFs for US Small Cap Stocks

With President Trump vowing to boost the US economy, investors may wish to consider American smaller companies with domestic revenues

Emma Wall 7 February, 2017 | 8:15AM
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Emma Wall: Hello and welcome to the Morningstar series "Ask the Expert". I'm Emma Wall and I'm joined today by passive fund analyst Monika Dutt.

Hi, Monika.

Monika Dutt: Hi. Glad to be here Emma.

Wall: So, in the last 12 months, we've had huge political events on both sides of the pond. Now in the U.K., the Brexit vote has actually seen a divergence in performance for large caps and small caps. But in the U.S., this hasn't been the case, has it? Because President Trump's election has seen both large caps and small cap sectors rally.

Dutt: Absolutely. There has been a rally and small caps, as well as, large caps because under a Republican controlled Congress and a President that wants to make America great again, this market has come into the spotlight.

Wall: And although we don't know whether its achievable or not, Trump is aiming for 4% GDP growth in the U.S. and it is traditionally those smaller companies that do well, when a domestic market is having economic growth, isn't it?

Dutt: Yes, small caps are less reliant on international trade and exports, so they're more are focused on the domestic market.

Wall: And having a look about how investors can gain exposure to this sector, I think people do think of passive strategies, when they're thinking about S&P 500 or U.S. large caps. But actually, there are several highly rated ETFs, that can offer exposure to the small cap U.S. market as well, aren't they?

Dutt: Absolutely. We actually just rated three, so two of them were rated Bronze and one was awarded a Sliver.

Wall: And how do these differ, perhaps you can go through them, one by one.

Dutt: Definitely. So, the one that was rated the highest the iShares S&P Small Cap 600, we really like the index, its efficient and it screens out unprofitable companies, which are actually a more of a concern as you delve into the micro-cap space.

Wall: And the second?

Dutt: The second one is the SPDR Russell 2000, so the main problem with it is that it follows a very popular benchmark. So, it has a lot of assets following it and transaction costs can be higher, which can hinder the performance. But SPDR does a really good job at mitigating those costs, they don't hold anywhere close to 2000 stocks. And the ETF is cheap at 30 basis points, it's actually one of the cheapest for that exposure.

Wall: And I suppose fans of passive funds, don't need to be reminded that cost is one of the few, in fact, the only known indicator that can contribute to future returns. So, having the very low fee, really does make a difference to the pound in your pocket.

Dutt: Absolutely.

Wall: And what's the third and final ETF?

Dutt: The third one is the iShares MSCI Small Cap ETF and we like MSCI's process. It’s a very well-constructed and efficient index. But its slightly less representative of small caps. Its one-third of the holdings are in mid-caps and it doesn't screen out unprofitable companies and its slightly expensive at $0.43 basis points.

Wall: But it still does give a good exposure to that small or smaller company market for individual investors looking to gain exposure in that sector.

Dutt: Exactly.

Wall: Monika, thank you very much.

Dutt: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
iShares MSCI USASmCp ESGEnh ETF USD Acc521.30 USD-0.82Rating
iShares S&P SmallCap 600 ETF USD Dist93.94 USD-0.85Rating
SPDR® Russell 2000 US Small Cap ETF63.93 USD-0.90Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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