Small-cap exchange-traded funds (ETFs) are designed to invest in a basket of stocks with relatively small market capitalizations. A small-cap company is generally one whose market value is somewhere between $300 million and $2 billion. However, small-cap ETFs are not necessarily restricted to that range, as evidenced by some of the holdings of the ETFs outlined below. Because of their size, small-cap stocks have strong, albeit often volatile, growth potential. A small-cap ETF can reduce the volatility associated with individual stocks while offering investors greater diversification.

Key Takeaways

  • The small-cap sector significantly outperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are CNBS, XSVM, and RFV.
  • The top holdings of these ETFs are class A shares of Silver Spike Acquisition Corp., class A shares of GameStop Corp., and Telephone and Data Systems Inc., respectively.

There are 45 distinct small-cap ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). The small-cap sector, as measured by the Russell 2000 Index, has significantly outperformed the broader market with a total return of  67.6% over the past 12 months compared to the S&P 500’s total return of 42.0%, as of May 18, 2021. The best-performing small-cap ETF, based on performance over the past year, is the Amplify Seymour Cannabis ETF (CNBS). We examine the top 3 best small-cap ETFs below. All numbers below are as of May 19, 2021.

  • Performance over 1-Year: 135.6%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: 0.42%
  • 3-Month Average Daily Volume: 181,571
  • Assets Under Management: $135.9 million
  • Inception Date: July 23, 2019
  • Issuer: Amplify Investments

CNBS is an actively managed ETF that provides exposure to the cannabis industry. The fund invests at least 80% of its assets in securities of companies that generate 50% or more of their revenue from the cannabis and hemp ecosystem. The majority of the fund’s holdings operate in two sectors of the cannabis market: cultivation and retail, and agricultural technology. But both investing and finance companies also represent a large share of the fund’s holdings. Most of its holdings are based in either the U.S. or Canada, but a portion of the portfolio is based in the U.K. and a small fraction in Israel. It follows a blended strategy investing in a mix of growth and value stocks of mostly mid- and small-cap companies. The fund’s top three holdings include class A shares of Silver Spike Acquisition Corp. (SSPK), a special purpose acquisition company that plans to acquire one or more businesses in the cannabis industry; Tilray Inc. (TLRY), a Canada-based supplier of medical cannabis products; and AFC Gamma Inc. (AFCG), a provider of financial services to companies operating in the cannabis industry.

  • Performance over 1-Year: 127.3%
  • Expense Ratio: 0.39%
  • Annual Dividend Yield: 0.69%
  • 3-Month Average Daily Volume: 104,656
  • Assets Under Management: $286.3 million
  • Inception Date: March 3, 2005
  • Issuer: Invesco

XSVM invests at least 90% of its total assets in the securities that comprise the S&P 600 High Momentum Value Index. The benchmark includes 120 securities in the S&P SmallCap 600 Index that have strong value and momentum characteristics. The ETF focuses on buying U.S. small-cap equities that are both relatively undervalued and exhibit strong momentum. The fund’s largest sector allocation is in consumer discretionary, followed by financials and industrials. Its top three holdings include class A shares of GameStop Corp. (GME), a video game retailer; Veritiv Corp. (VRTV), a distributor of print, publishing, packaging, and facility solutions; and United Natural Foods Inc. (UNFI), a distributor of natural, organic, and specialty food products.

  • Performance over 1-Year: 112.1%
  • Expense Ratio: 0.35%
  • Annual Dividend Yield: 1.04%
  • 3-Month Average Daily Volume: 30,427
  • Assets Under Management: $183.8 million
  • Inception Date: March 7, 2006
  • Issuer: Invesco

RFV invests at least 90% of its total assets in securities that make up the S&P MidCap 400 Pure Value Index. The ETF provides exposure to U.S. small- and mid-cap equities that are relatively undervalued as measured by: book value-to-price ratio; earnings-to-price ratio; and sales-to-price ratio. The fund’s largest sector allocation is in financials, followed by consumer discretionary and information technology. Its top three holdings include Telephone and Data Systems Inc. (TDS), a provider of telecommunications services; Avnet Inc. (AVT), a distributor of electronic components; and Commercial Metals Co. (CMC), a manufacturer of steel and metal products.

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