Best 2020 Small Cap ETFs and Mutual Funds

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TL;DR: Although small cap stocks have underperformed compared to large cap stocks recently, there are still small cap funds that provide good returns. Additionally, history teaches us that small cap stocks will eventually come back into favor and outperform large cap stocks. Find some of the best small cap funds in the table below.

A stock is considered a small cap stock if its valuation is generally less than 2 billion. Valuation is calculated by multiplying the number of outstanding shares by the price of the stock. 

Small cap stocks are typified by the Russell 2000 and large cap stocks are typified by the S&P 500.

Over the last five years, small cap growth stocks have under-performed large cap growth stocks by an annual return of 13.12% to 19.18%.  But if we look back 20 years, small cap stocks outperformed large cap stocks by a total return of 224% to 143%.  


If we look even further back to 1979 when the Russell 2000 was established, small cap stocks have only slightly outperformed large cap stocks. Even further back, comparing small caps to large caps from 1900, their returns are essentially the same. 

All of this indicates that having small cap funds in your portfolio is a really good idea for diversification. Small cap stocks have historically over-performed during turbulent economic times while large cap stocks have over-performed during times of economic expansion and stability. The anecdotal reason for this is that small companies tend to be more innovative, which is needed during turbulent times, while large stocks benefit from stable economies. 

Therefore, even though small cap funds have recently underperformed, it is likely they will begin to outperform as the more recent gains of large cap funds begin to recede. 

It would be wise to include these kind of funds in your portfolio now because attempting to time when the performance shift from large to small cap stocks will occur almost always results in failure as market timers almost always enter the market after the biggest gains have been realized.

The table below lists many good options. This list includes possible ETFs and mutual funds (minimum investment of $10,000 or less) with a market history of at least five years. For reference, the SPDR S&P 500 ETF is included and highlighted green to compare these funds with overall market returns. The ETFs highlighted in yellow are funds that mimic the overall small cap stocks (passively managed) and have industry standard weighting. Funds not highlighted are 1) ETFs that are based on a niche index, have an enhanced strategy or are actively managed, or based on non-standard weighting, or 2) are a mutual fund attempting to beat the market sector with various strategies.





Best Sector Index ETFs (least risky)

Vanguard Small-Cap Index Fund (VB)

Five Year Return (After Fees): 9.20%
Expense Ratio: 0.05%
Benchmark Index: CRSP US Small Cap Index
ETF Type: Passively Managed, Sector Index 
Top Five Holdings: Immunomedics Inc., Horizon Therapeutics PLC, Insulet Corp, Steris PLC, Etsy Inc. 


Vanguard Russell 2000 Index Fund (VTWO)

Five Year Return (After Fees): 8.44%
Expense Ratio: 0.10%
Benchmark Index: Russell 2000 Index
ETF Type: Passively Managed, Sector Index
Top Five Holdings: Penn National Gaming Inc., Sunrun Inc., Caesars Entertainment Inc., MyoKardia Inc., Novavax Inc.


Best Mutual Funds (more risky)

Morgan Stanley Institutional Fund, Inc. Inception Portfolio (MSSMX) 
Invests in established and emerging companies from the Russell 2000 Growth Index and emphasizes a bottom-up stock selection process.

Five Year Return (After Fees): 21.35%
Expense Ratio: 1.35%
Benchmark Index: N/A 
ETF Type: N/A 
Top Five Holdings: Fastly Inc., Stitch Fix Inc., Redfin Corp., AppFolio Inc., Appian Corp.


Wasatch Micro Cap Fund (WMICX) - Recommended
This fund focuses on micro cap companies which have a market cap less than 1.5B.

Five Year Return (After Fees): 21.18%
Expense Ratio: 1.66%
Benchmark Index: N/A 
ETF Type: N/A 
Top Five Holdings: Kornit Digital Ltd., GenMark Diagnostics Inc., Freshpet Inc., Five9 Inc., Medallia Inc.


Best Enhanced Strategy, Actively Managed, or Niche Index ETFs (more risky)

None. Funds in this category are very new and therefore do not have a significant track record to measure from or their performance rate is so far below the small cap passive index funds that they are not worth consideration.





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