How do I Choose the Best Small-Cap ETFs?

When an individual investor wants to consider best options for small-cap ETFs, he or she can evaluate many different aspects of these funds, from access and focus, to various levels of risk and potential reward. Although exchange traded funds (ETFs) are relatively new to financial markets, brokerages and exchanges now offer a wide diversity of these funds for easy trading. Among all of the options for small-cap ETFs, the best ones are those that fit the investor’s portfolio and overall trading strategy while offering low-cost trading opportunities.

In general, investors should understand that “small-cap” stocks tend to be less established and more vulnerable to volatility than larger “value stocks.” Many small-cap stocks in small-cap ETFs tend to be “local” to a particular country rather than being set up as multinational firms. It makes sense for an investor to look at where small-cap ETF stocks are “sourced,” or where the individual stocks come from. For example, an investor who wants to make a play in emerging markets like the BRIC countries (Brazil, Russian, India, and China) may want to secure a place with a small-cap ETF that includes only stocks from one or all of those countries.

Investors should also look at whether an small-cap ETF is an “actively managed” fund with contemporary stock picking, or a broader “index fund” that is made to mirror or follow a general stock index. Index funds generally include less risk than other smaller-focused small-cap ETFs. Choosing the best small-cap ETFs involves making choices about how much volatility the investor wants in the fund, keeping in mind that small-cap stocks are seen as riskier than their bigger counterparts.

In other evaluations of small-cap ETFs, investors can look at what kind of fees, if any, are charged for a specific fund. Generally, buying and selling ETFs is just like the “standard commission” for a single stock transaction, but it makes sense to look at whether any special charges apply. Investors can also look at how their brokerage firm provides access to small-cap ETFs, and how they will actively trade according to their own strategy. A long or short term strategy is just as important for small-cap ETFs as it is for small-cap stocks: both investments require a thoughtful approach in order to maximize gains and limit exposure to big losses.