Small Cap ETF: Small Companies Are More Likely To Grow In Multiples

In order to understand the appeal of a small cap ETF, it is necessary to understand what this type of investment actually is. We all know about companies like IBM, Citi, and Exxon because they operate globally, employ hundreds of thousands of people, and make billions of dollars a year. But smaller companies i.e. those with small market capitalization or small caps for short are another viable option for investors to consider. Small caps tend to focus on the markets in which they operate whether that is in the US or abroad.

When an investor is hoping to round out a portfolio with exposure to up-and-coming companies or ones that are more closely tied to local economies they should turn their attention to a small cap ETF. Their size tends to translate into limited capital and reach beyond immediate borders. Of course this isn't a hard and fast rule with web-based companies able to cross borders with relative ease.

International small caps also provide the additional variable of being more closely tied to currency fluctuations in the region they operate in. Depending on your perspective this can be a good thing or a bad thing. Weaker currencies can offset gains can vice versa so be sure to examine the potential impact before investing.

One thing I like about small cap ETFs is they allow me to get broader exposure to the market — the US in particular. With market-cap weighted ETFs like SPY, a significant portion of the investment dollars go towards a relatively small percentage of the companies. Investing in a small cap index fund in effect adjusts that weighting to make it more proportional. Combined with a mid-cap ETF you get more control than you would with a single ETF that attempts to cover all bases by tracking something like the S&P 1500.

Some small-cap ETF options to consider include the iShares S&P SmallCap 600 Index Fund IJR. iShares also offers value (IJS) and growth (IJT) variations of this ETF.

For even smaller companies, be sure to check out Micro Cap ETFs.