7 Inexpensive ETFs for Small-Cap and Micro-Cap Exposure

 | Feb 18, 2018 | 12:00 PM EST
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I tend to devote a lot of attention -- and column space -- toward deep-value investing, often in small-cap and micro-cap companies. This is not a world that some investors are either familiar or comfortable with. These areas of the market typically don't garner the analyst coverage that the Amazon's (AMZN) and Action Alerts PLUS holding Apple's (AAPL) of the world do, so investors are often on their own in terms of gathering information, following the stories, and making investment decisions.

Still, small-cap value and micro-cap are compelling areas of the market, and for those who want exposure, but do not want the risk and headache of owning individual names, there are other, cost-effective ways to do so. It is true that both small and micro-caps have been lagging their large-cap counterparts, particularly over the past year, but also over the past 3, 4, 5, 6 and 7-year periods, but sooner or later that should even out.

Exchange-traded funds (ETFs) are available for these asset classes, and while investing in these instead of individual stocks is a broader approach, it can still provide efficient exposure to what I believe is an exciting area of the market.

Here are some basic small-cap ETFs to consider, if you just want cheap exposure to the asset class:

Vanguard Small-Cap Value (VBR)  -- A very cheap way (the expense ratio is just 0.07%) to get index-like exposure to small value. By my count, it is also the largest of its kind with assets north of $12 billion, and a portfolio of nearly 900 companies, with an average market cap of $3.65 billion. This is very basic fund that is akin to purchasing beta on small cap value.

Vanguard S&P Small-Cap 600 Value Index (VIOV)  -- Smaller in size then VBR (with less than $300 million in assets), and slightly more expensive at 0.2%, it is a smaller portfolio with about 450 names, with an average market cap of $1.45 billion. The fund yields about 1.5%.

iShares Morningstar Small-Cap Value (JKL)  -- Slightly more expensive (0.3% expense ratio), but a more concentrated portfolio of 244 stocks with an average market cap of about $3 billion; yields about 1.7%.

More specialized funds:

ProShares Russell 2000 Dividend Growers (SMDV)  -- A newer fund that has been around since 2014, it focuses on an area that I've found quite compelling over the years, companies that perennially increase their dividends. In this case, the fund invests in Russell 2000 companies that have increased dividends for at least 10 consecutive years. There are currently 59 companies in the portfolio, with an average market cap of $2.11 billion. The fund is not surprisingly a bit more expensive at 0.4%, and it yields 1.8%. The fund is still fairly small, with assets just over $400 million.

iShares Micro-Cap (IWC)  -- The largest of the microcap ETFs (the jumbo shrimp as it were), with assets of $874 million, this fund has exposure to more than 1300 stocks, with an average market cap of just over $527 million. Not surprisingly, its expense ratio is higher at 0.6%, but that's par for the course with the smallest of the small. Trading costs just generally run higher In microcap land, where markets are less liquid.

First Trust Dow Jones MicroCap Index (FDM)  -- With just $100 million in assets, the fund owns 280 stocks, with an average market cap of $578 million. The expense ratio is also 0.6%. This fund is benchmarked to my all-time favorite, the Russell Microcap Index.

One Closed-End Fund to consider:

The Royce Micro-Cap Trust (RMT) , which has been around for nearly 25 years owns the smallest companies of any of the previously mentioned funds, with an average market cap of just $466 million. It holds 369 stocks, and is the most expensive of the bunch, with an expense ratio just 1%. It also yields 7.32%, and trades at a 10% discount to the fund's net asset value. Trading at a discount is not uncommon for closed-end funds; in fact RMT's discount has ranged from a high of more than 17% (2016), to a low of 9.8% (2017).

There's more than one way to skin a cat, in this, case, to get exposure to small-cap value and microcaps. I generally prefer to do it via individual names, but for those who want exposure without the headaches and additional risk, ETFs are a low-cost, efficient alternative.

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