The Smaller the Better In ETFs (IJR, IWC, MGC)

When it comes to investing, bigger is not always better.

The large cap stocks are often the names that everyone knows and loves, however they may not be the best investment option when the goal is to make money.

Large cap stocks are typically perceived as safer and more stable than the small cap stocks because they have been profitable for many years and have steady revenue. On the other hand, as a company matures they tend to get so big that future growth expectations will begin to diminish. That is evident in such companies as Microsoft MSFT; they are too big to get out of their own way and the market becomes saturated with their products unless they are able to reinvent their business model.

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The small cap stocks are not necessarily startups, but they a common thread that most have is above average growth. When an investor buys a stock they are investing in the future earnings of the company and high growth can lead to above average stock gains.

There are a large number of ETFs that invest in small cap stocks in a variety of approaches. Investors must make sure to do their due diligence to find which small cap ETF meets the desired goals that are attempting to be achieved.

iShares Core S&P Small Cap ETF IJR

The ETF is a highly diversified basket of 602 stocks that focuses on the S&P Small Cap 600 Index. With the top holding only making up 0.6 percent of the portfolio and the top ten holdings only accounting for 5.4 percent of the allocation, the ETF is truly diversified. The financials, information technology, and consumer discretionary stocks are the most heavily weighted sectors.

Year-to-date the ETF is up 34.3 percent compared to a gain of 25.6 percent for the Vanguard Mega Cap 300 Index ETF MGC. The annual expense ratio is 0.17 percent and the dividend yield is 1.1 percent.

iShares Micro Cap ETF IWC

Moving down another notch on the market capitalization ladder is the micro cap stocks, which are even smaller in size. IWC takes an extremely diverse approach to the asset class with over 1350 stocks and a top ten that only accounts for 3.2 percent of the ETF. The financial, health care, and technology sectors are the three largest sectors represented.

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The performance of IWC is nearly identical to IJR in 2013 with a gain of 34.2 percent. The expense ratio is higher due to the exposure to stocks that are not as liquid and the nature of the asset class. The annual expense ratio is 0.74 percent. The dividend yield is 0.9 percent.

In most core portfolio allocations, but large cap and small cap stocks will be represented. However, it is integral not to over look the growth potential of small cap stocks when investing for the long-term.