Exchange-Traded Funds For Dummies
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If you have a portfolio of under $20,000 or so, consider small cap blend ETFs, which combine small value and small growth stocks. Small cap domestic stocks shouldn’t occupy more than 20 percent or so of your portfolio. So keep it simple until your portfolio grows to the point that you can start slicing and dicing a bit more economically.

A bit of growth, a bit of value, your choice in small cap blend funds should take into consideration such things as expense ratios, average cap size, and P/E ratio. Keep in mind that these numbers are subject to change, so check them before you act.

Vanguard Small Cap ETF (VB)

Indexed to: MSCI U.S. Small Cap 1750 Index (1,750 broadly diversified smaller U.S. companies)

Expense ratio: 0.17 percent

Average cap size: $1.8 billion

P/E ratio: 27.3

Top five holdings: Informatica Corp., Polycom Inc., TIBCO Software Inc., SM Energy Company, WABCO Holdings Inc.

The expense ratio is quite low, especially when compared to most other offerings in the small cap arena. The diversification is lovely. And Vanguard’s ETFs — largely because they are pegged to indexes with little turnover — are arguably the most tax-efficient of all ETFs.

On the downside, the P/E ratio is higher than that of competing ETFs (an indication of a greater orientation toward growth and away from value). And the average cap size is larger than some others. On balance, this is a very good selection. There are no commissions for trading this ETF if it’s held at Vanguard.

iShares Morningstar Small Core ETF (JKJ)

Indexed to: 260 companies from the Morningstar Small Core Index that fall somewhere between extreme growth and value

Expense ratio: 0.25 percent

Average cap size: $1.9 billion

P/E ratio: 24.6

Top five holdings: SandRidge Energy Inc., Cypress Semiconductor Corp., Polaris Industries Inc., Amerigroup Corp., The Cooper Companies Inc.

The diversification isn’t quite what you get with Vanguard, but it’s adequate. The somewhat lower P/E could translate into slightly higher returns over the next few years, but that may be offset by the higher expense ratio. These Morningstar iShares aren’t heavily traded, so you could get zonked with a larger spread when you buy and sell.

iShares S&P Small Cap 600 ETF (IJR)

Indexed to: Roughly 600 companies that make up the S&P Small Cap 600 Index

Expense ratio: 0.20

Average cap size: $1.2 billion

P/E ratio: 25.3

Top five holdings: Regeneron Pharmaceuticals Inc., Amerigroup Corp., HealthSpring Inc., Holly Corp., BioMed Realty Trust Inc.

This is a perfectly acceptable ETF for small cap exposure at a fair price. Vanguard’s price, however, is even more fair. If you already own this ETF, that’s not reason enough to switch. But if you’re starting from scratch, paying the higher fee may not be warranted. This ETF trades free of commission if held at Fidelity, so it may be an optimal selection in smaller portfolios where trading costs can make a more serious dent.

Schwab U.S. Small-Cap ETF (SCHA)

Indexed to: Dow Jones U.S. Small-Cap Total Stock Market Index (1,750 of America’s most modest-sized publicly traded companies)

Expense ratio: 0.13 percent

Average cap size: $1.8 billion

P/E ratio: 19.1

Top five holdings: Atmel Corp., Riverbed Technology Inc., Skyworks Solutions Inc., Chimera Investment Corp., Gentex Corp.

The low P/E ratio indicates something of a value lean, which isn’t a bad thing to have if this one fund is your only exposure to U.S. small caps. The number of stocks represented is large, and (all other things being equal) a larger number of stocks in an index is better. The expense ratio of this ETF is the lowest in the category, and the fund trades free of commissions if held at Schwab.

About This Article

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About the book author:

Russell Wild, MBA, an expert on index investing, is a fee-only financial planner and investment advisor and the principal of Global Portfolios. He is the author or coauthor of nearly two dozen nonfiction books.

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