Best Small-Cap Index Fund

Invest in the best small cap index fund today with Interactive Brokers.

Because of their positive performances and strong returns, small-cap index funds are popular among risk-taking investors. No investment comes without risk. It’s important to understand the positives and negatives of small-cap funds to help your portfolio produce the best returns.

Small-cap index funds track the performance of small-cap companies, usually with a market cap of less than $2 billion. 

Investors are exposed to a range of smaller companies, potentially in the early stages of their life cycles. These stocks carry more risk than large-cap stocks but come with the potential for higher returns.

6 Best Small-Cap Index Funds to Invest in

Small-cap index funds offer several benefits to investors, but their higher levels of volatility make investing in the right funds crucial. Below you can find some of the best small-cap index funds available.

1. iShares Russell 2000 ETF (NYSEARCA: IWM)

The iShares Russell 2000 ETF is the most popular small-cap ETF. The fund tracks the Russell 2000 index.

The fund has performed well historically, benefitting from bull markets. However, the fund is at risk from bearish runs. As a result, it has previously fallen significantly because of the risks that smaller businesses bring.

Investors in the iShares Russell 2000 are exposed to various sectors such as healthcare, technology and industrials. Some of its top holdings include Super Micro Computer, ChampionX and Rambus.

2. Vanguard Small-Cap Index Fund (NYSEARCA: VB)  

This investment tracks the performance of the CRSP US Small-Cap Index, offering a diverse group of sectors and stocks to expand an investor’s portfolio. The fund holds a diversified portfolio of industrial, technology, consumer cyclical and several other industries, with a focus on value stocks. 

The fund is attractive because of its small net expense ratio of 0.05%. Its performance this year has been solid, growing over 10% YTD as markets remain relatively volatile. Investors can expect strong returns once market sentiment begins to improve.

3. SPDR S&P 600 Small-Cap ETF (NYSEARCA: SLYV)

The SPDR S&P 600 fund tracks the S&P SmallCap 600 index, which covers the small-cap range of U.S. stocks, using a capitalization-weighted index. It can offer a strong potential for upside but a higher risk in the fund as these stocks have more uncertainty.

The index fund gained more than 9% as investors capitalizes on the growth of small companies.

The fund's expense ratio is higher than some index funds on the list, at 0.15%. If you are looking to hold more exposure across some of the smallest stocks across the U.S. market, then this fund may be perfect for you.

4. Schwab Fundamental U.S. Small-Cap Index Fund (NASDAQ: SNSFX)

This fund tracks the Russell RAFI US Small Company Index, making it a popular and valuable option for investors' portfolios. The fund’s focus on undervalued stocks and dividends offers strong growth potential and regular returns, reducing risk for investors.

It holds $1.77 billion in total net assets, spread across numerous sectors such as industrials, consumer cyclical and financial services. It has an expense ratio of 0.25% but could be worth it for investors seeking a fairly priced small-cap fund.

5. Vanguard Tax-Managed Small-Cap Admiral Fund (MUTF: VTMSX)

The Vanguard Tax-Managed Small-Cap Admiral Fund requires a minimum investment requirement of $10,000. The fund benchmarks the S&P SmallCap 600 index, with a heavy weighting towards industrials, at almost 18%.

The fund can provide a tax-efficient return through long-term capital appreciation. With an expense ratio of just 0.09%, it may be a beneficial option for those with a large portion of cash available.

6. Fidelity Small-Cap Value Index Fund (MUTF: FISVX)

The Fidelity Small-Cap Value Index Fund aims to correspond with the total return of small-cap U.S. companies. The fund currently holds $963 million in total assets and has an expense ratio of 0.05%.

The potential in value stocks, especially in some of its top sectors such as industrials and consumer cyclicals, can make this fund attractive. Despite its risks, the current economic climate may offer greater potential in value funds.

What Are Small-Cap Index Funds?

Small-cap index funds track are types of ETFs that track smaller companies, usually with a market capitalization of less than $2 billion. This metric offers positive and negative characteristics that may not be found among the larger, more well-known companies.

Small-cap index funds come with several advantages, such as the potential for large returns as well as diversification, which can reduce the risk of exposure to just one market. They track the performance of several different stocks across numerous sectors and usually offer low fees.

Smaller stocks can be more volatile and less liquid than large-cap businesses, so these benefits do not come without a degree of risk. These index funds could be good investments for investors looking to diversify their portfolios.

Benefits of Small-Cap Index Funds

If you are looking to invest in small-cap index funds, some of the benefits are listed below.

• Diversification and reduced risk: Small-cap index funds expose you to a diverse choice of equities from various industries. Some of these index funds are dispersed across many markets, which helps investors decrease risk. This factor can also improve your portfolio’s performance, as your portfolio is balanced across a number of industries.
• Potential for higher returns: Small-cap stocks have an immense opportunity for growth. They are not yet established, placing them in a strong position to outperform some of the top players. They can grow at a faster pace and offer the potential for higher returns.
• Long-term growth prospects: Many small-cap indexes have historically outperformed large-cap index funds, making their prospects over the long term attractive.
• Enhanced exposure to smaller growing companies: The growth opportunities among smaller companies are substantial. Exposure to this field can enhance your performance, especially during bullish runs where these index funds thrive.

Factors to Consider When Choosing the Best Small-Cap Index Fund

Despite the many positives small-cap index funds offer, you’ll want to consider these factors when investing.

Expense Ratios and Fees

An expense ratio is a fee paid to the fund manager to manage your investment. Expense ratios and fees vary depending on the index fund. Choosing one with the lowest expense ratio can help you retain more of your returns. 

Tracking Error and Index Replication Method

A tracking error can occur based on the divergence of the price behavior between the position and its benchmark. The price may not be replicating as intended, creating an issue in your position. This risk meant that you may wish to measure the fund’s historical performance before entering your position.

Fund Management and Track Record

Although historical performance is not indicative of future results, it can help establish a better idea of its future performance. It can also identify how the fund has been managed and look at key factors that may impact future performance.

Availability of Dividend Reinvestment Program

Dividend reinvestment programs are available for some index funds, and their availability may be helpful to your investment strategy. Some funds offer these programs, helping you reinvest your dividends automatically and potentially improve your returns over the long term.

Where to Invest in Small-Cap Index Funds

If you are looking to invest in these small-cap index funds, you must first be set up with a broker. It is vital to pick the best broker for you, some of which are listed below.

Is Now the Time to Add Small-Cap Index Funds to Your Portfolio?

Investing in small-cap index funds and other diversified funds has proved successful historically, and after a market wobble it could be a good time to take advantage of small-cap funds. Depending on your investing style, long-term investing, regardless of the fund type, helps to reduce risks, and investing in small-cap index funds could provide a good opportunity to diversify your current portfolio.

Frequently Asked Questions