PruFid Financial Advisors LLC

US Small-Cap Funds

There are at least two good reasons why most investors invest a portion of their portfolios in small-cap stocks:

• Small-Cap stocks may have better long-term returns than large-cap stocks.
• Small-Cap stocks have relatively low correlations with large-cap stocks, so including them in an otherwise large-cap stock portfolio should improve the portfolio's risk/return characteristics.

There are several very similar investment options available. Which is best?

The funds are listed in rough order of our overall preference.

Preferences are listed separately for use in retirement accounts and for taxable accounts.

For a listing of our preferences in other asset classes, see here.

Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)

• Invesco S&P SmallCap Momentum ETF (XSMO). E/R: 0.37%. This fund attempts to track the S&P SmallCap 600 Momentum Index. This index starts with the S&P 600. It takes the 20% highest momentum stocks thereof. Then it weights the stocks by the product of their market capitalization and their momentum score. This gives a very momentum-y portfolio which might have somewhat less turnover than one that didn't include market capitalization in its weighting.
• AQR Small Cap Momentum Style Fund (ASMOX). E/R: 0.60%. This fund invests in small-cap momentum stocks (i.e., small-cap stocks that have done well over the past 12 months, excluding the most recent month). This fund is managed to minimize short-term capital gain distributions.
• Invesco DWA SmallCap Momentum ETF (DWAS). E/R: 0.60%. This fund attempts to track the Dorsey Wright SmallCap Technical Leaders Index. This index uses a proprietary process to select small-cap securities which demonstrate powerful relative strength characteristics based on the company's market performance.
• Invesco S&P SmallCap Quality ETF (XSHQ). E/R: 0.29%. This fund attempts to track the S&P SmallCap 600 Quality Index. This index starts with the S&P 600. It takes the 120 highest-quality stocks thereof. Then it weights the stocks by the product of their market capitalization and their quality score. This gives a very quality-y portfolio which might have somewhat less turnover than one that didn't include market capitalization in its weighting.
• Bridgeway Ultra-Small Company Market Fund (BRSIX). E/R: 0.75%. This fund basically tries to track the CRSP 10 index, which is an index of all domestic stocks whose market capitalization is in the bottom decile of stocks traded on the New York Stock Exchange. The fund is tax-managed to minimize capital gains distributions, but this shouldn't preclude it from being used in a retirement account. The expense ratio looks high, but isn't, considering the extreme smallness of the stocks it invests in.
• Avantis U.S. Small Cap Equity Fund (AVSCX). E/R: 0.25%. This fund buys small-cap stocks with a tilt towards profitability.
• Avantis U.S. Small Cap Equity ETF (AVSC). E/R: 0.25%. This ETF buys small-cap stocks with a tilt towards profitability.
• DFA US Micro Cap Portfolio (DFSCX). E/R: 0.40%. This fund basically has a strategy of buying stocks of companies whose market capitalizations are generally in the lowest 5% of total market capitalization, or companies whose market capitalizations are smaller than the 1,500th largest US company—whichever results in a higher market-cap break.
• iShares Microcap Index Fund (IWC). E/R: 0.60%. This ETF tracks the Russell Microcap Index (the 1000 smallest stocks of the Russell 2000 index, plus the next 1000 largest stocks smaller than those in the Russell 2000 index). We expect the NAV-mkt tracking error to be quite large for this fund, due to the extreme illiquidity of the underlying stocks.
• First Trust Dow Jones Select MicroCap Fund (FDM). E/R: 0.60%. This ETF tracks the Dow Jones Select Microcap Index. We expect the NAV-mkt tracking error to be quite large for this fund, due to the extreme illiquidity of the underlying stocks.
• Vanguard Small Cap Index Fund Admiral Shares (VSMAX). E/R: 0.05%. This fund tracks the CRSP US Small Cap Index.
• Fidelity Small Cap Index Fund (FSSNX). E/R: 0.025%. This fund tracks the Russell 2000 Index of small US stocks.
• Schwab U.S. Small-Cap ETF (SCHA). E/R: 0.04%. This ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index.
• BNY Mellon US Small Cap Core Equity ETF (BKSE). E/R: 0.04%. This ETF attempts to track the Morningstar US Small Cap Index of small US companies.
• SPDR Portfolio S&P 600 Small Cap ETF (SPSM). E/R: 0.03%. This ETF attempts to track the S&P SmallCap 600 Index of small US companies.
• Vanguard Small Cap ETF (VB). E/R: 0.05%. This ETF is a share class of the Vanguard Small Cap Index Fund (VSMAX).
• iShares Core S&P Small-Cap ETF (IJR). E/R: 0.06%. This ETF tracks the S&P Small Cap 600 index.
• Global X Russell 2000 ETF (RSSL). E/R: 0.08%. This ETF tracks the Russell 2000 RIC Capped Index.
• Vanguard S&P Small Cap 600 ETF (VIOO). E/R: 0.07%. This ETF is a share class of the Vanguard S&P Small Cap 600 Index Fund Institutional Shares (VSMSX).
• Vanguard Russell 2000 Index ETF (VTWO). E/R: 0.07%. This ETF is a share class of the Vanguard Russell 2000 Index Fund Institutional Shares (VRTIX).
• DFA US Small Cap Portfolio (DFSTX). E/R: 0.27%. This fund essentially tracks the CRSP 6-10 index, which is an index of all domestic stocks whose market capitalization is in the bottom half of stocks traded on the New York Stock Exchange. Given the above better alternatives, we see little reason to buy this fund.
• Dimensional U.S. Small Cap ETF (DFAS). E/R: 0.26%. This fund essentially tracks the CRSP 6-10 index, which is an index of all domestic stocks whose market capitalization is in the bottom half of stocks traded on the New York Stock Exchange. The fund manages to minimize dividends.
• iShares Russell 2000 Fund (IWM). E/R: 0.19%. This ETF tracks the Russell 2000 index.
• WisdomTree US SmallCap Earnings ETF (EES). E/R: 0.38%. This is an ETF which tracks the WisdomTree SmallCap Earnings Index. This index is built by removing the 500 largest (by market-cap) companies in the WisdomTree Earnings Index of positive earnings companies and then removing the 75% largest market capitalization companies of those remaining. The index weights the remaining companies by the cash value of their earnings. The WisdomTree SmallCap Earnings Index is a non-cap weighted index of US small-cap stocks. The high expense ratio and relative illiquidity costs (i.e., bid-ask spreads) of new ETFs such as this cause us pause at this time. Further, we are concerned that this fund holds a relatively large percentage of its assets in REITs (which we consider to be a separate asset class) and the stocks that the fund buys simply aren't very small.
• WisdomTree US SmallCap Dividend ETF (DES). E/R: 0.38%. This is an ETF which tracks the WisdomTree SmallCap Dividend Index. This index is built by removing the 300 largest (by market-cap) companies in the WisdomTree Dividend Index of regular dividend paying companies and then removing the 75% largest market capitalization companies of those remaining. The index weights the remaining companies by the cash value of their dividend payouts. The WisdomTree SmallCap Dividend Index is a non-cap weighted index of US small-cap stocks. The high expense ratio and relative illiquidity costs (i.e., bid-ask spreads) of new ETFs such as this cause us pause at this time. Further, we are concerned that this fund holds a relatively large percentage of its assets in REITs (which we consider to be a separate asset class) and the stocks that the fund buys simply aren't very small.
• Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ). E/R: 0.39%. This is an ETF which tracks the FTSE RAFI 1500 US Small-Mid Index, a non-cap weighted index of US small-cap stocks.

Taxable Accounts

• Invesco S&P SmallCap Momentum ETF (XSMO). E/R: 0.37%. This fund attempts to track the S&P SmallCap 600 Momentum Index. This index starts with the S&P 600. It takes the 20% highest momentum stocks thereof. Then it weights the stocks by the product of their market capitalization and their momentum score. This gives a very momentum-y portfolio which might have somewhat less turnover than one that didn't include market capitalization in its weighting.
• Invesco DWA SmallCap Momentum ETF (DWAS). E/R: 0.60%. This fund attempts to track the Dorsey Wright SmallCap Technical Leaders Index. This index uses a proprietary process to select small-cap securities which demonstrate powerful relative strength characteristics based on the company's market performance.
• AQR Small Cap Momentum Style Fund (ASMOX). E/R: 0.60%. This fund invests in small-cap momentum stocks (i.e., small-cap stocks that have done well over the past 12 months, excluding the most recent month). This fund is managed to minimize short-term capital gain distributions.
• Invesco S&P SmallCap Quality ETF (XSHQ). E/R: 0.29%. This fund attempts to track the S&P SmallCap 600 Quality Index. This index starts with the S&P 600. It takes the 120 highest-quality stocks thereof. Then it weights the stocks by the product of their market capitalization and their quality score. This gives a very quality-y portfolio which might have somewhat less turnover than one that didn't include market capitalization in its weighting.
• Avantis U.S. Small Cap Equity ETF (AVSC). E/R: 0.25%. This ETF buys small-cap stocks with a tilt towards profitability.
• iShares Microcap Index Fund (IWC). E/R: 0.60%. This ETF tracks the Russell Microcap Index (the 1000 smallest stocks of the Russell 2000 index, plus the next 1000 largest stocks smaller than those in the Russell 2000 index). We expect the NAV-mkt tracking error to be quite large for this fund, due to the extreme illiquidity of the underlying stocks.
• Bridgeway Ultra-Small Company Market Fund (BRSIX). E/R: 0.75%. This fund basically tries to track the CRSP 10 index, which is an index of all domestic stocks whose market capitalization is in the bottom decile of stocks traded on the New York Stock Exchange. The fund is tax-managed to minimize capital gains distributions, but this shouldn't preclude it from being used in a retirement account. The expense ratio looks high, but isn't, considering the extreme smallness of the stocks it invests in.
• First Trust Dow Jones Select MicroCap Fund (FDM). E/R: 0.60%. This ETF tracks the Dow Jones Select Microcap Index. We expect the NAV-mkt tracking error to be quite large for this fund, due to the extreme illiquidity of the underlying stocks.
• Dimensional U.S. Small Cap ETF (DFAS). E/R: 0.26%. This fund essentially tracks the CRSP 6-10 index, which is an index of all domestic stocks whose market capitalization is in the bottom half of stocks traded on the New York Stock Exchange. The fund manages to minimize dividends.
• Vanguard Small Cap Index Fund Admiral Shares (VSMAX). E/R: 0.05%. This fund tracks the CRSP US Small Cap Index.
• Schwab U.S. Small-Cap ETF (SCHA). E/R: 0.04%. This ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index.
• BNY Mellon US Small Cap Core Equity ETF (BKSE). E/R: 0.04%. This ETF attempts to track the Morningstar US Small Cap Index of small US companies.
• SPDR Portfolio S&P 600 Small Cap ETF (SPSM). E/R: 0.03%. This ETF attempts to track the S&P SmallCap 600 Index of small US companies.
• Vanguard Small Cap ETF (VB). E/R: 0.05%. This ETF is a share class of the Vanguard Small Cap Index Fund (VSMAX).
• iShares Core S&P Small-Cap ETF (IJR). E/R: 0.06%. This ETF tracks the S&P Small Cap 600 index.
• Global X Russell 2000 ETF (RSSL). E/R: 0.08%. This ETF tracks the Russell 2000 RIC Capped Index.
• Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX). E/R: 0.12%. This fund tracks the S&P Small Cap 600 index while minimizing capital gains.
• Vanguard S&P Small Cap 600 ETF (VIOO). E/R: 0.07%. This ETF is a share class of the Vanguard S&P Small Cap 600 Index Fund Institutional Shares (VSMSX).
• Vanguard Russell 2000 Index ETF (VTWO). E/R: 0.07%. This ETF is a share class of the Vanguard Russell 2000 Index Fund Institutional Shares (VRTIX).
• iShares Russell 2000 Fund (IWM). E/R: 0.19%. This ETF tracks the Russell 2000 index.
• WisdomTree US SmallCap Earnings ETF (EES). E/R: 0.38%. This is an ETF which tracks the WisdomTree SmallCap Earnings Index. This index is built by removing the 500 largest (by market cap) companies in the WisdomTree Earnings Index of positive earnings companies and then removing the 75% largest market capitalization companies of those remaining. The index weights the remaining companies by the cash value of their earnings. The WisdomTree SmallCap Earnings Index is a non-cap weighted index of US small-cap stocks. The high expense ratio and relative illiquidity costs (i.e., bid-ask spreads) of new ETFs such as this cause us pause at this time. Further, we are concerned that this fund holds a relatively large percentage of its assets in REITs (which we consider to be a separate asset class) and the stocks that the fund buys simply aren't very small.
• WisdomTree US SmallCap Dividend ETF (DES). E/R: 0.38%. This is an ETF which tracks the WisdomTree SmallCap Dividend Index. This index is built by removing the 300 largest (by market cap) companies in the WisdomTree Dividend Index of regular dividend paying companies and then removing the 75% largest market capitalization companies of those remaining. The index weights the remaining companies by the cash value of their dividend payouts. The WisdomTree SmallCap Dividend Index is a non-cap weighted index of US small-cap stocks. The relative illiquidity costs (i.e., bid-ask spreads) of new ETFs such as this cause us pause at this time. Further, we are concerned that this fund holds a relatively large percentage of its assets in REITs (which we consider to be a separate asset class) and the stocks that the fund buys simply aren't very small.
• Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ). E/R: 0.39%. This is an ETF which tracks the FTSE RAFI 1500 US Small-Mid Index, a non-cap weighted index of US small-cap stocks.

This web page contains the current opinions of Eric E. Haas at the time it is written—and such opinions are subject to change without notice. This web page is intended to serve two purposes:

• To educate the public; and
• To provide disclosure of Mr. Haas' opinions to prospective clients. We believe that prospective clients are well-served by being made aware of what they are buying—and what they are buying is advice that is based on these opinions.

We believe the information provided here to be useful and accurate at the time it is written. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

No investor should invest solely on the basis of information listed here. Before investing, it is important to consult each prospective investment's prospectus and consider both its risk/return characteristics and its effect on your overall portfolio.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, PruFid recommends consultation with a qualified tax adviser, CPA, financial planner, or investment adviser. If you would like to discuss the rationale or support for any particular idea expressed on this web page, feel free to contact us.