Best Small-Cap ETFs for Growth Potential
Small-cap stocks offer higher growth potential with higher risk. Here are the best small-cap ETFs and how much to allocate.
Don't have time? Here's what you need to know:
- 1Small-cap stocks have historically returned 1-2% more per year than large-caps, but with more volatility
- 2IJR (S&P SmallCap 600) screens for profitability — a quality edge over IWM (Russell 2000)
- 3VTI already holds ~7% small-caps; adding a dedicated fund is a deliberate overweight
- 4Small-cap value (VBR) has the strongest academic backing for a factor tilt
Small-Cap Stocks: Higher Risk, Historically Higher Reward
Small-cap companies have market capitalizations under $2 billion. They are younger, faster-growing, and more volatile than large-caps. Historically, small-cap stocks have returned about 1-2% more per year than large-caps over very long periods — the 'small-cap premium.' However, this premium has been inconsistent: small-caps outperformed in the 1970s-1990s but lagged in the 2010s.
Small-cap ETFs give you exposure to thousands of these companies in a single fund. VB (Vanguard Small-Cap) holds over 1,400 stocks spanning every sector. These are companies like Five Below, Crocs, Texas Roadhouse — well-known businesses that are not large enough for the S&P 500.
Best Small-Cap ETFs Compared
IJR has an edge: the S&P SmallCap 600 screens for profitability, excluding money-losing companies. This quality filter has historically produced slightly better returns than the Russell 2000 (IWM), which includes unprofitable companies. VB and SCHA are broad alternatives at lower cost.
| ETF | Index | Expense Ratio | Holdings | Includes Micro-Caps | 5-Year Return |
|---|---|---|---|---|---|
| VB | CRSP U.S. Small-Cap | 0.05% | 1,400+ | Some | ~8% |
| IJR | S&P SmallCap 600 | 0.06% | 600+ | No (profitability screen) | ~9% |
| SCHA | Dow Jones U.S. Small-Cap | 0.04% | 1,700+ | Some | ~7% |
| IWM | Russell 2000 | 0.19% | 2,000 | Yes | ~6% |
| VBR | Small-Cap Value | 0.07% | 850+ | Some | ~8% |
How Much Small-Cap Should You Hold?
If you own VTI, small-caps already represent about 7% of your portfolio. Adding a dedicated small-cap ETF increases that allocation. Common approaches: 5-15% in a separate small-cap ETF as a satellite holding. Going above 15% creates significant sector overlap with VTI.
Small-cap value (VBR) has the strongest academic backing. The Fama-French research that identified the value premium also found that it was strongest among small companies. If you want factor exposure, VBR targets both the small-cap and value premiums simultaneously.
Tip: Small-caps are more volatile than large-caps — expect wider price swings. In 2022, IWM dropped 22% while VTI dropped 20%. In 2020, small-caps dropped 42% in the March crash (vs 34% for the S&P 500) before rebounding sharply.
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Frequently Asked Questions
Is the small-cap premium dead?
It has been weak since 2010, but 'dead' is a strong claim. Academic research shows the premium still exists in international markets and in small-cap value (not small-cap growth). The premium may be smaller than historical averages, but completely writing it off ignores decades of evidence.
IWM or VB — which is better?
VB is cheaper (0.05% vs 0.19%) and holds fewer micro-cap stocks. IWM tracks the Russell 2000, which includes more very small and unprofitable companies. For most investors, VB or IJR is the better choice.
Should beginners own small-cap ETFs?
Not as a first purchase. VTI already includes small-caps at market weight. Add a dedicated small-cap fund only after your core portfolio is established (VTI + VXUS + BND) and your balance exceeds $25,000-50,000. Small-caps add complexity without essential diversification at small portfolio sizes.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.