How to Choose Small Cap Blend Exchange-Traded Funds - dummies

How to Choose Small Cap Blend Exchange-Traded Funds

By Russell Wild

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.

Some good ETF options for people with limited-size portfolios include the Vanguard Small Cap (VB), iShares Morningstar Small Core (JKJ), iShares S&P Small Cap 600 (IJR), and Schwab U.S. Small-Cap (SCHA) ETFs.

Vanguard Small Cap ETF (VB)

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

Expense ratio: 0.09 percent

Average cap size: $3.1 billion

P/E ratio: 22.3

Top five holdings: Alkermes, Harman International, Alaska Air, Snap-on Inc, Packaging Corp of America

Russells review: 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. Those are the three positives. On the downside, the P/E ratio is higher than that of some 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, but (as with all blend funds) scrap it for something more refined — a growth and value split — as soon as your portfolio is large enough to allow for such refinement. 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: $2.6 billion

P/E ratio: 22.1

Top five holdings: Alkermes, Harman International, Alaska Air, Snap-on Inc, Packaging Corp of America

Russells review: 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. If you already own this ETF, that’s not reason enough to switch unless you’re holding a rather large position and capital gains are not an issue. But if you’re starting from scratch, paying the higher fee would be warranted. 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: 0.12

Average cap size: $1.5 billion

P/E ratio: 22.0

Top five holdings: Tiquint Semiconductor, West Pharmaceutical Services Inc, Teledyne Technologies, Maximus Inc, Toro Co.

Russells review: This is a perfectly acceptable ETF for small cap exposure at a fair price. The average cap size is smaller than most other small cap funds, which could add juice (but also volatility) to this holding. 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: 0.08 percent

Average cap size: $2.5 billion

P/E ratio: 20.6

Top five holdings: Tiquint Semiconductor, West Pharmaceutical Services Inc, Teledyne Technologies, Maximus Inc, Toro Co. Russells review: 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. All in all, it isn’t a bad package.