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ETF News And Commentary

Small cap stocks are broadly leading the market higher, and are easily outpacing their large cap counterparts over the past few months. In fact, the broad Russell 2000 has nearly doubled the S&P 500’s returns over the past three months, showcasing just how much the focus has been on pint-sized securities as of late.

This trend could definitely continue too, assuming a risk-on environment stays in the marketplace, and the focus remains on domestically-exposed stocks. After all, international investing has been shaky as of late—even with the no taper announcement—while the U.S. economy is humming along. And in this type of environment, a look towards higher beta growth stocks—which are well positioned for a risk-on situation—could be an excellent play.

These growth focused small caps have actually outperformed even the broad market small cap ETFs as of late by a pretty wide margin, while they have been leading value-tilted funds as well. Given this, these small cap growth ETFs could be the way to go in today’s type of market environment and below we have highlighted three top options in this space that can provide excellent exposure to the segment in basket form:

iShares Russell 2000 Growth ETF (IWO - ETF report)

This ETF follows the Russell 2000 Growth Index, giving exposure to about 1,120 companies in the broader Russell 2000 Index that have growth characteristics. The ETF is pretty popular, with nearly $6 billion in AUM and average daily volume approaching one million shares a day. The cost of this product comes in at 25 basis points a year, so pretty reasonable from that front.

In terms of the portfolio, IWO doesn’t allocate more than 0.66% to any one stock, though it is relatively concentrated from a sector look. Technology and health care both make up more than 20%, while industrials and consumer discretionary both account for at least 15% as well (see all the small cap ETFs here).

For performance, IWO has added about 31% in the past one year, while its three month gain stands at 15.1%.

Vanguard S&P Small-Cap 600 Growth ETF (VIOG - ETF report)

Vanguard’s entrant in the small cap growth ETF space follows the S&P SmallCap 600 Growth Index, a benchmark that provides exposure to about 360 pint-sized stocks. The fund is relatively unpopular though, so bid ask spreads might be a bit wider, but the product does charge just 20 basis points a year in fees, making it a cheap choice in the space.

Thanks to its fewer number of holdings, VIOG is a bit more concentrated, though every stock makes up less than 1.6% of the total asset base. In terms of sector exposure, technology takes the top spot at 22%, while consumer discretionary (17%), health care (15%), and financials (13%) round out the top four.

VIOG has added about 14.1% over the past three month time frame, while it has added nearly 29.1% in the past one year (also see 3 Small Cap ETFs Leading the Market Higher).

iShares S&P SmallCap 600 Growth ETF (IJT - ETF report)

Another iShares choice, this ETF follows a growth stock subset of the S&P Small Cap 600 Index, holding roughly 360 stocks in its basket. This makes it pretty similar to VIOG, but IJT does have better volume, though it does cost a tad more in expenses.

In terms of holdings, IJT doesn’t put more than 1.6% in any one stock either, giving it a nice level of diversification. The sector breakdown is pretty similar to VIOG in this ETF, putting big weights in technology, consumer discretionary, health care, and financials.

For performance, IJT has added 29.05% in the trailing one year time frame, while in the past three months, the ETF has added 13.8%. While this has lagged both of the others on the list, it has still handily outperformed (IWM - ETF report)—as well as large cap focused ETFs—for the time period in question (read Forget SPY, Focus on Mid and Small Cap ETFs).



Bottom Line

Small caps have been flying under the radar as of late, crushing the broad markets in the process. This has largely been thanks to some positive trends in the space which have made investors tilt towards domestically-focused growth plays.

While all small cap ETFs have benefited from this trend, the real winners have been the higher beta choices. Investors may want to tap into these for the months ahead, as these still have some steam and positive trends at their back, suggesting that the aforementioned small cap growth ETFs could still have some room to run to close out 2013.

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