If you have a portfolio of more than $20,000 and you can buy-and-hold, break up your small cap holdings into a growth ETF and a value ETF. Given the dramatic outperformance of value in the past, you might tilt in that direction — more so than you do with large caps. A reasonable tilt may call for somewhere between 60 and 75 of your small cap exposure going to value, and 25 to 40 percent going to growth.
Following are some good small growth options from iShares and Vanguard.
Vanguard Small Cap Growth ETF (VBK)
Indexed to: MSCI U.S. Small Cap Growth Index (approximately 970 small cap growth companies in the United States)
Expense ratio: 0.12 percent
Average cap size: $1.9 billion
P/E ratio: 34.5
Top five holdings: Informatica Corp., Polycom Inc., TIBCO Software Inc., VeriFone Systems Inc., JDS Uniphase Corp.
Vanguard charges 0.05 less for this fund than it does for its small cap blend ETF. Add to that economy the wide diversification, tax efficiency beyond compare, and a very definite growth exposure, and the Vanguard Small Cap Growth ETF offers an excellent way to tap into this asset class. And that’s especially true if you happen to hold your portfolio at Vanguard, where trading Vanguard ETFs incurs no commissions.
iShares Morningstar Small Growth Index ETF (JKK)
Indexed to: Approximately 370 companies from the Morningstar Small Growth Index
Expense ratio: 0.30 percent
Average cap size: $1.8 billion
P/E ratio: 34.1
Top five holdings: Biomarin Pharmaceutical, Interdigital Inc., Techne Corp., Equity Lifestyle Properties, Coeur D’Alene Mines Corp.
Morningstar indexes tend to be a bit too concentrated, at least in the large cap arena. In their small caps, however, concentration isn’t a problem. The largest holding here, Biomarin Pharmaceutical, gets an acceptably small 1.2 percent allocation.
The expense ratio, too, is acceptable, although higher than some others in this category. Morningstar promises no crossover between growth and value. If you own this ETF along with the iShares Morningstar Small Value Index, you should get pleasantly limited correlation.
iShares S&P Small Cap 600 Growth ETF (IJT)
Indexed to: Despite the “600” in its name, this ETF tracks the 350 or so holdings that make up the S&P Small Cap 600/Citigroup Growth Index
Expense ratio: 0.25 percent
Average cap size: $1.3 billion
P/E ratio: 26.7
Top five holdings: Regeneron Pharmaceuticals Inc., HealthSpring Inc., American Medical Systems Holdings Inc., Salix Pharmaceuticals Ltd., Signature Bank
S&P indexes are a bit too subjective to really love them. The fund’s price is reasonable, and there’s no reason to snub this iShares offering. Apparently, Fidelity likes it because it allows you to buy and sell this ETF without paying any commission. (Of course, Fidelity gets some remuneration from iShares.)
Guggenheim S&P 600 Small Cap Pure Growth ETF (RZG)
Indexed to: Approximately 150 of the smallest and most growthy of the S&P 600 companies
Expense ratio: 0.35
Average cap size: $1.2 billion
P/E ratio: 20.0
Top five holdings: Sturm Ruger & Co., Hi-Tech Pharmacal Co., BJ’s Restaurants, Regeneron Pharmaceuticals Inc., Jos. A Bank Clothiers
The price is higher than others in this category, and the promise of “purity” is a bit murky — especially if the quest for purity leads to high turnover, which could reduce tax efficiency. Guggenheim also seems to cater mostly to traders rather than to buy-and-hold investors, and that makes some investors uncomfortable. Traders usually trade themselves into losses. Caveat: More than one-third of the holdings in this fund are tech stocks.