Big Growth With Popular Small-Cap ETF

MarketsETF Trends

This article was originally published on ETFTrends.com.

Small-cap stocks and the related exchange traded funds are often prized for their growth prospects and small-cap ETFs are explicitly dedicated to the growth factor, including the popular Vanguard Small-Cap Growth ETF (NYSEArca: VBK).

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VBK tries to reflect the performance of the CRSP US Small Cap Growth Index. While the small-cap segment has recently underperformed, investors may be in a position to capitalize on a turnaround as small-capitalization stocks have historically exhibited long-term outperformance relative to large-cap stocks. Year-to-date, VBK is up about 2.2%.

Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.

As the broad equities market pushes toward new highs, riskier assets like small-caps have been able to rally back much quicker. When the economy is doing well and the markets rally, we see sentiment for more nimble smaller companies improve and outperform those of their more languorous, larger peers.

“If you want potential for greater long-term returns than mid- and large-caps have historically produced, and you don’t mind taking more market risk to get them, the Vanguard Small-Cap Growth ETF (NYSE: VBK) is a smart choice,” reports InvestorPlace. “The VBK portfolio attempts to replicate the returns of the CRSP US Small Cap Growth Index, which covers about 650 U.S. stocks with a median market cap of $4.9 billion.”

That median market cap actually puts VBK in mid-cap territory. The ETF's largest sector allocation is 21.5% to industrials while financial services and industrials combine for over a third of its weight. Healthcare and consumer discretionary combine for over 30%.

Small-cap growth stocks are typically pricey relative to the broader small stock space and VBK proves as much with a price-to-earnings ratio of 31.3. That is well above the S&P 500 and even the Russell 2000 Index.

What is cheap about VBK is its 0.07% annual fee, which makes it less expensive than 94% of competing strategies.

For more on smart beta ETFs, visit our Smart Beta Channel.

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