Small Cap ETFs Set to Outperform Again

The small-cap stocks, as measured by the Russell 2000 Index, closed 2014 with a gain of 3.5 percent. However, when compared to its larger peers the index greatly underperformed for the first time in years. Through February the Russell 2000 is up 2.4 percent, slightly outperforming the S&P 500. The good news is that the valuations for the smaller stocks have come back down to reasonable levels even as the index hit a new all-time high this week. Looking ahead for the remainder of the year, there is a high probability investors will look for investment opportunities in higher reward stocks and the small caps fit this bill. A factor that is often overlooked is the fact the small cap stocks will be less affected by a rising U.S. Dollar due to the high amount of sales within the U.S. With the U.S. Dollar Index near a multi-year high, the small cap stocks should be able to benefit from a prolonged rally in the greenback. Highlighted below are a few of the largest small cap ETFs. The iShares Russell 2000 Index ETF IWM is comprised of nearly 2,000 small cap companies in nine different sectors. The financials make up 24 percent and information technology comes in at 18 percent, making up a large portion of the portfolio. The top individual holdings include Quorvo Inc QRVO with a 0.56 percent holding, ISIS Pharmaceuticals Inc. ISIS making up 0.45 percent of the ETF, and Brunswick Corp BC at 0.28 percent. IWM is up 5 percent over the last 12 months and up 5 percent over the last six months. The ETF has an expense ratio of 0.20 percent. The Vanguard Small Cap ETF VB follows 1,494 small-cap stocks across 11 sectors. The largest sectors include the financials at 26 percent, industrials at 19 percent, and consumer services coming in at 14 percent. The top individual holdings include Alkermes Inc ALKS with a 0.4 percent holding, Alaska Air Group ALK making up 0.3 percent of the ETF, and Harman International Industries Inc. HAR at 0.3 percent. VB is up 8 percent over the last 12 months and is up 3 percent over the last six months. The ETF has an expense ratio of 0.09 percent. The iShares Core S&P Small Cap ETF IJR is made up of 601 small cap U.S companies across 11 sectors. The most heavily weighted sectors are the financials and information technology sectors at 23 percent and 17 percent, respectively. The top individual holdings include Maximus Inc MMS at 0.56 percent, West Pharmaceutical Services Inc WST making up 0.55 percent, and Toro Co TTC totaling 0.54 percent. IJR is up 7 percent over the last 12 months and up 5 percent over the last six months. The small cap ETF has an expense ratio of 0.12 percent.