Exchange Traded Funds (ETFs)

Growing Back Into Small-Caps

As my readers know, I am a strong supporter of the importance of communication with our loved ones and the fellow human beings that we share our planet with, as this is really the only way to live life to its fullest.

Indeed, when investors come up to me at investment conferences, I am happy to answer their investing-related questions. One of these is whether small-cap stocks or large-cap stocks are a better investment to secure your financial future.

Adherents of the “large-cap-stocks-are-better” theory point to research by Jennison Dryden, indicating that investors are quicker to flee small-cap stocks for more stable large-cap stocks at the first sign of economic trouble. After all, small-cap stocks tend to be more volatile and can be strongly affected during times of market turbulence, particularly when the market is not doing well or when investors flee growth stocks for value stocks.

At the same time, growth-stock aficionados mention that small-cap stocks are often the first to bounce back during an economic recovery. One cause behind this is that small-cap companies can shift physical and economic resources more rapidly than a large corporation, enabling them to react more quickly to economic changes.

One way to generate profits from small-cap stocks is through the exchange-traded fund (ETF) Vanguard Small-Cap Growth ETF (NYSEARCA: VBK). While this fund should be familiar to my Successful Investing subscribers (and if you aren’t one, why not?), there are still some points about the fund that are worth mentioning.

The fund tracks a Center for Research in Security Prices (CRSP) index that focuses on growing small-capitalization companies within the United States. The index in question uses metrics such as three-year historical growth in earnings per share (EPS), growth in sales per share, current investment-to-assets ratio and return on assets to place small-cap stocks into different baskets. Securities then receive a rank and a weighting based on these factors.

Exclusive ETF Talk: Look Small, Think Big

Top holdings in the portfolio include Mutual Fund (Other), Fair Isaac Corp. (NYSE: FICO), Entegris, Inc. (NASDAQ: ENTG), Targa Resources Corp. (NYSE: TRGP), Exact Sciences Corp. (NASDAQ: EXAS), PTC Inc. (NASDAQ: PTC) and Liberty Media Corp. Series C Liberty Formula One (NASDAQ: FWONK).

As of June 6, 2023, this fund has been up 4.63% over the past month, up 9.11% over the past three months and up 12.86% year to date.

This ETF has total net assets of $14.33 billion and an expense ratio of 0.07%.

Chart courtesy of StockCharts.com.

While VBK is a way to ride the wave of small-cap growth stocks, investors should be aware of the risks associated with investing in such a fund and always do their due diligence before adding any stock or fund to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.