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This month’s ETF First Cut seeks domestic small-cap stock exchange-traded funds (ETFs) that have performed well compared to their peers over the last five years. The list of small-cap ETFs in the table is grouped by categories of blended, growth and value, ranked by five-year return. Because individual investors do not typically invest in ETFs for the short term, it is important to compare funds based on their longer-term performance.

Category averages were included to better compare each ETF to its peers and to see how the different investing styles performed.

ETFs without consistent and strong relative performance within their categories were eliminated by requiring five-year, three-year and one-year return A+ Investor grades of C or better. The screen excludes leveraged and inverse ETFs and requires an expense ratio category rank below 60%. Passing ETFs also have at least $25 million in total assets and a minimum daily trading volume of 5,000 shares. To eliminate ETFs with excessive risk, funds with an A+ Investor category risk grade of F were excluded.

In total, only eight ETFs made the First Cut. The biggest limiting factor to the number of small-cap ETFs passing is the small size of the ETF universe. Of the total 651 domestic equity ETFs, 65% are large-cap focused. Mid-cap and small-cap representation are roughly equal at 19% and 16% of the universe, respectively.

Given the comparatively shorter period of time ETFs have been in existence relative to mutual funds and the dominance of large-cap equities led by the technology sector in the last decade, it is not surprising that there is underrepresentation of small- and mid-cap ETFs; there has been less incentive for fund management companies to create them.

All eight passing ETFs are index funds. Of the total 107 small-cap ETFs, 81% are index funds.

Small-cap ETFs are more volatile than large-cap or mid-cap ETFs, and they often have longer periods of underperformance. However, this normally translates into larger long-term gains after corrections in the market take place. Looking at one-year returns, you see high returns due to the economic recovery from the 2020 bear market induced by the coronavirus pandemic.

The economic recovery also led to high returns for small-cap value ETFs compared to small-cap growth ETFs. This followed years of underperformance from the value category. The types of sectors normally considered to be within the value category—for example, consumer cyclicals, industrials and financials—did well this year as the U.S. economy recovered strongly.

Small-Cap ETFs Showing Strong & Consistent Relative Performance
(Ranked by Five-Year Return)

Category	Fund	Ticker	5-Yr Ann’lizd Ret (%)	5-Yr Ret Cat Grade	3-Yr Ann’lizd Ret (%)	3-YrRet Cat Grade	1-Yr Ann’lizd Ret (%)	1-Yr Ret Cat Grade	Category Risk Index	Exp Ratio (%)	Total Assets ($ Mil)	Index Fund
Category	Fund	Ticker	5-Yr Ann’lizd Ret (%)	5-Yr Ret Cat Grade	3-Yr Ann’lizd Ret (%)	3-YrRet Cat Grade	1-Yr Ann’lizd Ret (%)	1-Yr Ret Cat Grade	Category Risk Index	Exp Ratio (%)	Total Assets ($ Mil)	Index Fund
Small Blend	Vanguard Russell 2000 ETF	VTWO	14.3	A	11.6	B	52.1	C	1.03	0.10	5,901	Yes
Small Blend	iShares Russell 2000 ETF	IWM	14.2	B	11.4	B	51.8	D	1.03	0.19	66,476	Yes
Small Blend	SPDR Portfolio S&P 600 SmCp ETF	SPSM	14.2	B	11.3	B	56.9	B	1.05	0.05	4,052	Yes
Small Blend	SPDR S&P 600 Small Cap ETF	SLY	14.1	C	10.2	D	56.9	B	1.05	0.15	1,760	Yes
Small Blend	Vanguard S&P Small-Cap 600 ETF	VIOO	14.1	B	10.2	C	56.9	B	1.05	0.10	1,755	Yes
Small Blend Category Average			13.0		10.3		52.8			0.35
Small Growth	Invesco DWA SmallCap Mom ETF	DWAS	18.0	A	16.2	A	49.2	B	1.06	0.60	454	Yes
Small Growth Category Average			15.8		13.0		45.7			0.52
Small Value	SPDR S&P 600 Small Cap Value ETF	SLYV	12.2	B	8.2	C	65.2	B	0.98	0.15	3,932	Yes
Small Value	Vanguard S&P Sm-Cp 600 Val ETF	VIOV	12.2	C	8.2	C	65.4	B	0.98	0.15	1,338	Yes
Small Value Category Average			11.8		8.9		66.8			0.36
Source: AAII/Morningstar. Data as of 7/31/2021.