10 Small Cap Growth ETFs

Published on September 15, 2023 at 10:27 am by Usman Kabir in Hedge Funds, News

In this article, we discuss the 10 small cap growth ETFs. If you want to read about some more growth ETFs, go directly to 5 Small Cap Growth ETFs.

The stock market in the United States has undergone immense change in the past few years as technology stocks like Tesla, Inc. (NASDAQ:TSLA), Apple Inc. (NASDAQ:AAPL), and Microsoft Corporation (NASDAQ:MSFT) morph into trillion dollar behemoths while traditional market giants like manufacturing conglomerates and energy firms struggle to keep pace. In May this year, the market capitalization of Apple Inc. (NASDAQ:AAPL) climbed above the total market cap of 2,000 companies on the Russell 2000 Index, the premier small cap US stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.

In the past five years, the shares of Apple Inc. (NASDAQ:AAPL) have returned more than 200% to investors. In contrast, the exchanged-traded funds (ETFs) that invest in firms on the Russell 2000 Index have only returned about 8% to investors. These trends have forced financial advisors to be hesitant about recommending investments in small cap ETFs. However, small cap ETFs still offer incredible value for money. Small cap ETFs offer diversified exposure while minimizing single stock risk. They are also transparent entities that disclose their holdings on a daily basis so investors can keep track of their money.

According to Zachary Evens, an analyst at financial services firm Morningstar, the relative size and competitive positioning of small cap companies allow them to quickly capitalize on new business opportunities. Evens is of the view that these opportunities may be risky but can lead to big payoffs for companies that execute effectively. The analyst claims that investors are willing to pay up for companies like these during bull markets, driving their share prices higher and because of this, small cap stocks in aggregate can perform especially well when markets rise, as has been the case in the past few months.

Our Methodology

The ETFs listed below are discussed with regards to their top holdings. The aim of the article is to provide readers with a basic rundown of some of the top small cap growth ETFs in the US. All the ETFs listed below trade on exchanges in the United States. The list is arranged according to the Year-to-Date (YTD) returns of the ETFs. The five-year returns of each ETF are also mentioned for further clarity.

Source:unsplash

Small Cap Growth ETFs

12. SPDR S&P 600 Small Cap Growth ETF (NYSE:SLYG)

YTD Return as of September 14: 4.6%

5-Year Return as of September 14: 8.4%

SPDR S&P 600 Small Cap Growth ETF (NYSE:SLYG) is an exchange traded fund that invests at least 80% of net assets in companies on the S&P 600 Small Cap Growth Index. The index comprises small cap firms in the US that exhibit growth characteristics.

One of the biggest holdings of the SPDR S&P 600 Small Cap Growth ETF (NYSE:SLYG) is SPS Commerce, Inc. (NASDAQ:SPSC), a firm that provides cloud-based supply chain management solutions. Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Driehaus Capital is a leading shareholder in SPS Commerce, Inc. (NASDAQ:SPSC) with 223,922 shares worth more than $43 million.

Just like Tesla, Inc. (NASDAQ:TSLA), Apple Inc. (NASDAQ:AAPL), and Microsoft Corporation (NASDAQ:MSFT), SPS Commerce, Inc. (NASDAQ:SPSC) is one of the growth stocks with strong upside potential.

In its Q2 2022 investor letter, Conestoga Capital Advisors, an asset management firm, highlighted a few stocks and SPS Commerce, Inc. (NASDAQ:SPSC) was one of them. Here is what the fund said:

“SPS Commerce, Inc. (NASDAQ:SPSC): SPSC is a provider of supply chain management software and has now been a leader in three of the past four quarters. SPSC benefits from secular growth in the digitization of ecommerce and from a steady, durable business model that has remained resilient in a slower macroeconomic environment. The company highlights that historically they have only seen about a 1% drag on revenue growth from macro slowdowns. SPSC grew revenue 20% and earnings per share by 22% in their most recent quarter.”

11. Vanguard S&P Small-Cap 600 Growth Index Fund (NYSE:VIOG)

YTD Return as of September 14: 4.5%

5-Year Return as of September 14: 8.8%

Vanguard S&P Small-Cap 600 Growth Index Fund (NYSE:VIOG) is an exchange traded fund that tracks the performance of the S&P SmallCap 600 Growth Index. The latter represents the growth companies of the S&P SmallCap 600 Index.

Vanguard S&P Small-Cap 600 Growth Index Fund (NYSE:VIOG) holds a large stake in Rambus Inc. (NASDAQ:RMBS), a semiconductor firm. At the end of the second quarter of 2023, 31 hedge funds in the database of Insider Monkey held stakes worth $413 million in Rambus Inc. (NASDAQ:RMBS), compared to 26 in the preceding quarter worth $256 million.

10. iShares S&P Small-Cap 600 Growth ETF (NASDAQ:IJT)

YTD Return as of September 14: 4.9%

5-Year Return as of September 14: 8.6%

iShares S&P Small-Cap 600 Growth ETF (NASDAQ:IJT) is an exchange traded fund that invests at least 80% of total assets in securities on an index that measures the equity market performance of small capitalization growth stocks in the US.

A flagship holding of the iShares S&P Small-Cap 600 Growth ETF (NASDAQ:IJT) is Onto Innovation Inc. (NYSE:ONTO), a firm that offers process control tools that perform macro defect inspection and 2D/3D optical metrology, lithography systems, and process control analytical software worldwide. At the end of the second quarter of 2023, 20 hedge funds in the database of Insider Monkey held stakes worth $176 million in Onto Innovation Inc. (NYSE:ONTO), up from 16 in the previous quarter worth $134 million.

In its Q3 2022 investor letter, TimesSquare Capital Management highlighted a few stocks and Onto Innovation Inc. (NYSE:ONTO) was one of them. Here is what the fund said:

“New to the strategy was Onto Innovation Inc. (NYSE:ONTO), which develops inspection technologies for use across the entire semiconductor fabrication process. Though other companies in the fabrication industry reported lower results or cited weak market conditions, Onto’s fundamentals were relatively unaffected. Sales for its process control systems were a function of transitions to new technologies and the construction of new facilities—both of which were increasing—and not merely overall semiconductor capacities. Nevertheless, Onto’s shares pulled back mid-quarter, which made an attractive entry point for us.”

9. Nuveen ESG Small-Cap ETF (BATS:NUSC)

YTD Return as of September 14: 5.3%

5-Year Return as of September 14: 11.4%

Nuveen ESG Small-Cap ETF (BATS:NUSC) is an exchange traded fund that invests exclusively in small cap stocks that exhibit growth characteristics. The fund invests at least 80% of net assets in small cap securities listed on US exchanges that meet certain environmental, social, and governance criteria.

A premier holding of the Nuveen ESG Small-Cap ETF (BATS:NUSC) is EMCOR Group, Inc. (NYSE:EME), a company that provides electrical and mechanical construction, and facilities services . At the end of the second quarter of 2023, 35 hedge funds in the database of Insider Monkey held stakes worth $375 million in EMCOR Group, Inc. (NYSE:EME), compared to 26 in the preceding quarter worth $306 million.

In its Q2 2023 investor letter, Third Avenue Management, an asset management firm, highlighted a few stocks and EMCOR Group, Inc. (NYSE:EME) was one of them. Here is what the fund said:

“EMCOR Group, Inc. (NYSE:EME) and Madison Square Garden Entertainment were eliminated in the second quarter. EMCOR Group has been in the portfolio for nearly twelve years and was an outstanding performer as the company generated a 20% annualized return over the holding period. The market capitalization was approaching $8 billion when we exited the position. Consistent with our strategy, we prefer to own companies with market capitalizations below $3 billion. Yet, we do not have a “hard sell” when market capitalizations surpass $3 billion. Instead, it becomes an easier candidate for sale when valuations are elevated. We believe the combination of valuation and market capitalization achieved in the second quarter justified exiting the position. We wish the management team well as they have built an outstanding company.”

8. iShares ESG Aware MSCI USA Small-Cap ETF (BATS:ESML)

YTD Return as of September 14: 6.1%

5-Year Return as of September 14: 21.5%

iShares ESG Aware MSCI USA Small-Cap ETF (BATS:ESML) is an exchange traded fund that invests in companies on the MSCI USA Small Cap Index. The index is designed to measure the performance of the small cap segment of the US equity market.

iShares ESG Aware MSCI USA Small-Cap ETF (BATS:ESML) holds a large stake in Federal Realty Investment Trust (NYSE:FRT), a firm that invests in high-quality retail-based properties located primarily in major coastal markets. At the end of the second quarter of 2023, 15 hedge funds in the database of Insider Monkey held stakes worth $124 million in Federal Realty Investment Trust (NYSE:FRT), compared to 21 in the preceding quarter worth $82 million.

7. Pacer US Small Cap Cash Cows Growth Leaders ETF (NASDAQ:CAFG)

YTD Return as of September 14: 7.1%

5-Year Return as of September 14: 5.8%

Pacer US Small Cap Cash Cows Growth Leaders ETF (NASDAQ:CAFG) is a fund that tracks the performance of small cap companies in the US. The fund uses a rules-based methodology that seeks to provide exposure to small capitalization US-based companies with above average free cash flow margins.

One of the biggest holdings of Pacer US Small Cap Cash Cows Growth Leaders ETF (NASDAQ:CAFG) is Powell Industries, Inc. (NASDAQ:POWL), a firm that designs, develops, manufactures, sells, and services custom-engineered equipment and systems for the distribution, control, and monitoring of electrical energy. At the end of the second quarter of 2023, 14 hedge funds in the database of Insider Monkey held stakes worth $33 million in Powell Industries, Inc. (NASDAQ:POWL), compared to 8 in the preceding quarter worth $25 million.

In its Q4 2022 investor letter, Heartland Advisors, an asset management firm, highlighted a few stocks and Powell Industries, Inc. (NASDAQ:POWL) was one of them. Here is what the fund said:

“It’s more accurate to say we favor companies with defensive characteristics that are likely to be secular winners, even if the economy doesn’t offer much of a tailwind. And once the next cycle begins, these are companies that stand to benefit as the economy re-accelerates.

An example is Powell Industries, Inc. (NASDAQ:POWL), which manufactures electrical power distribution equipment and components used in pipelines, offshore drilling platforms, data centers, and large industrial facilities. After experiencing a downturn along with oil prices in recent years, Powell is now enjoying a tailwind from energy’s rebound, especially liquified natural gas related. Order activity, in fact, has risen for six consecutive quarters. And for the full year, new orders rose 78% compared to fiscal 2021.

Powell enjoys self-help catalysts as well. The company, with significant insider ownership, has been focused on internal capital allocation moves lately to position itself for a more profitable future. In fiscal year 2022, for instance, the company divested a low-margin industrial valve repair division within Powell Canada. At the same time, the company has been investing in its higher-margin services business to improve its overall mix of revenue sources.

Yet, very few sell-side analysts cover the stock, and those who do, don’t seem to appreciate the internal and external tailwinds the company enjoys. This is where our selectivity comes into focus.”

6. Invesco S&P SmallCap Momentum ETF (NYSE:XSMO)

YTD Return as of September 14: 7.3%

5-Year Return as of September 14: 23.4%

Invesco S&P SmallCap Momentum ETF (NYSE:XSMO) is an exchange traded fund that invests in firms on the S&P SmallCap 600 Index that have the highest momentum score. The fund focuses on small cap growth stocks that may outperform the market in the short-term.

A premier holding of Invesco S&P SmallCap Momentum ETF (NYSE:XSMO) is e.l.f. Beauty, Inc. (NYSE:ELF), a firm that provides cosmetic and skin care products. Among the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Driehaus Capital is a leading shareholder in e.l.f. Beauty, Inc. (NYSE:ELF) with 891,025 shares worth more than $101 million.

Alongside Tesla, Inc. (NASDAQ:TSLA), Apple Inc. (NASDAQ:AAPL), and Microsoft Corporation (NASDAQ:MSFT), e.l.f. Beauty, Inc. (NYSE:ELF) is one of the growth stocks with strong upside potential.

In its Q4 2022 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and e.l.f. Beauty, Inc. (NYSE:ELF) was one of them. Here is what the fund said:

“New positions initiated in Q4 included shorts International Business Machines (IBM), Acushnet Holdings (GOLF) and E.l.f. Beauty, Inc. (NYSE:ELF). Shares of value-oriented beauty brand ELF received a meaningful boost from normalizing beauty usage and spending in a post-COVID environment, which we believe has contributed to its premium multiple relative to competitors in the beauty space. As this temporary lift unwinds, we expect elf’s valuation to similarly return to a level better aligned with its product offerings.”

Click to continue reading and see 5 Small Cap Growth ETFs.

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