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Domestic Small-Cap Funds

 

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

bulletSmall-Cap stocks may have better long-term returns than large-cap stocks.
 
bulletSmall-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 similar-seeming 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)

bulletAQR Small Cap Momentum Style Fund (ASMOX).  E/R: 0.66%.  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).  Momentum has been shown to have both a positive risk premium and a negative correlation with the value premium.  Thus, momentum stocks are good diversifiers to value stocks.  As such, this fund is most appropriate for those who are using it to both get small cap exposure and to diversify value exposure elsewhere in their portfolio.  Because this fund is expected to have very high turnover and is not managed to minimize capital gains distributions, it is inappropriate to hold it in a taxable account, unless you have high realized capital losses banked.   For more information on momentum investing, see here.

bulletBridgeway Ultra-Small Company Market Fund (BRSIX).  E/R: 0.77%.  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.  Compared to peer funds (i.e., those investing in ultra-small cap stocks), it is quite low.  This fund charges a 2% redemption fee for shares sold within six months of purchase.  That fee is paid directly to the fund in order to provide a disincentive for market-timers.

bulletBridgeway Small Cap Momentum Fund (BRSMX).  E/R: 0.90%.  This fund invests in small cap risk-adjusted momentum stocks (i.e., small-cap stocks that have done well over the past 12 months, excluding the most recent month, for their volatility).  Risk-adjusted momentum has been shown to have both a positive risk premium and a negative correlation with the value premium.  Thus, such stocks are good diversifiers to value stocks.  As such, this fund is most appropriate for those who are using it to both get small cap exposure and to diversify value exposure elsewhere in their portfolio.  This fund charges a 2% redemption fee for shares sold within six months of purchase.  That fee is paid directly to the fund in order to provide a disincentive for market-timers.  Because this fund is expected to have very high turnover and is not managed to minimize capital gains distributions, it is inappropriate to hold it in a taxable account, unless you have high realized capital losses banked.   For more information on momentum investing, see here.

bulletiShares 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.  For more information on ETFs, see here.
 
bulletFirst 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.  For more information on ETFs, see here.
 
bulletDFA US Micro Cap Portfolio (DFSCX).  E/R: 0.52%.  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.  Unfortunately, this fund is closed to new investors.

bulletWilshire Micro-Cap ETF (WMCR).  E/R: 0.50%.  This ETF tracks the Wilshire US Micro-Cap Index (the next 2500 stocks smaller in market capitalization than the 2500th largest stock in the Wilshire 5000 Index).  We expect the NAV-mkt tracking error to be quite large for this fund, due to the extreme illiquidity of the underlying stocks.  For more information on ETFs, see here.
 
bulletVanguard Small Cap Index Fund Admiral Shares (VSMAX).  E/R: 0.09%.  Initial minimum investment = $10,000.  This fund tracks the CRSP US Small Cap Index.  While its expense ratio is lower than the funds listed above, the stocks it invests in are nowhere near as small.

bulletVanguard Small Cap ETF (VB).  E/R: 0.09%.  This ETF is a share class of the Vanguard Small Cap Index Fund (NAESX).  For more information on ETFs, see here.

bulletSchwab U.S. Small-Cap ETF (SCHA).  E/R: 0.10%.  This ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index.  For more information on ETFs, see here.

bulletVanguard S&P Small Cap 600 ETF (VIOO).  E/R: 0.15%.  This ETF is a share class of the Vanguard S&P Small Cap 600 Index Fund Institutional Shares (VSMSX).  For more information on ETFs, see here.

bulletVanguard Russell 2000 Index ETF (VTWO).  E/R: 0.15%.  This ETF is a share class of the Vanguard Russell 2000 Index Fund Institutional Shares (VRTIX).  For more information on ETFs, see here.

bulletVanguard Small Cap Index Fund (NAESX).  E/R: 0.24%.  This fund tracks the CRSP US Small Cap Index.  While its expense ratio is lower than BRSIX and IWC above, the stocks it invests in are nowhere near as small.

bulletDFA US Small Cap Portfolio (DFSTX).  E/R: 0.37%.  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.

bulletiShares S&P Small Cap 600 Fund (IJR).  E/R: 0.20%.  This ETF tracks the S&P Small Cap 600 index.  For more information on ETFs, see here.

bulletiShares Russell 2000 Fund (IWM).  E/R: 0.20%.  This ETF tracks the Russell 2000 index.  For more information on ETFs, see here.

bulletiShares Morningstar Small Core Fund (JKJ).  E/R: 0.25%.  This ETF tracks all stocks which Morningstar considers to be "Small Core."  For more information on ETFs, see here.

bulletFocus Morningstar Small Cap Index ETF (FOS).  E/R: 0.12%.  This ETF tracks the Morningstar Small Cap Index.  For more information on ETFs, see here.

bulletFidelity Spartan Small Cap Index Fund - Fidelity Advantage Class (FSSVX).  E/R: 0.30%.  Minimum initial purchase: $10,000.  This fund tracks the Russell 2000 Index of small US stocks.  The fund charges a short-term redemption fee of 1.50% if you sell shares within 90 days of buying them.  This fee, paid directly to the fund, is intended to discourage market timing.
 
bulletWisdomTree SmallCap Earnings Fund (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.  For more information on ETFs, see here.

bulletWisdomTree SmallCap Dividend Fund (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.  For more information on ETFs, see here.

bulletPowerShares FTSE RAFI US Small-Mid Portfolio (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.  The high expense ratio and relative illiquidity costs of new funds such as this cause us pause at this time.  For more information on ETFs, see here.
 
bulletSchwab Fundamental US Small-Mid Company Index Fund (SFSVX).  E/R: 0.59%.  This fund tracks the FTSE RAFI 1500 US Small-Mid Index, a non-cap weighted index of US small cap stocks.  The high expense ratio precludes this being a good choice.  Two lower cost share classes are available for higher minimum dollar amounts, but even those are too expensive, given the less expensive small cap choices above.

Taxable Accounts

bulletiShares 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.  For more information on ETFs, see here.
 
bulletAQR TM Small Cap Momentum Style Fund (ATSMX).  E/R: 0.70%.  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).  Momentum has been shown to have both a positive risk premium and a negative correlation with the value premium.  Thus, momentum stocks are good diversifiers to value stocks.  As such, this fund is most appropriate for those who are using it to both get small cap exposure and to diversify value exposure elsewhere in their portfolio.  This fund manages to lessen short-term capital gain and dividend distributions.   For more information on momentum investing, see here.

bulletFirst 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.  For more information on ETFs, see here.
 
bulletWilshire Micro-Cap ETF (WMCR).  E/R: 0.50%.  This ETF tracks the Wilshire US Micro-Cap Index (the next 2500 stocks smaller in market capitalization than the 2500th largest stock in the Wilshire 5000 Index).  We expect the NAV-mkt tracking error to be quite large for this fund, due to the extreme illiquidity of the underlying stocks.  For more information on ETFs, see here.
 
bulletBridgeway Ultra-Small Company Market Fund (BRSIX).  E/R: 0.77%.  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.  This fund charges a 2% redemption fee for shares sold within six months of purchase.  That fee is paid directly to the fund in order to provide a disincentive for market-timers.  The fund is tax-managed to lessen capital gains distributions, but it isn't expected to be as capital gains tax-efficient as virtually all ETFs are which is the primary reason it isn't more highly rated here.

bulletDFA Tax-Managed US Small Cap Portfolio (DFTSX).  E/R: 0.53%.  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 as well as capital gains.

bulletSchwab U.S. Small-Cap ETF (SCHA).  E/R: 0.10%.  This ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index.  For more information on ETFs, see here.

bulletVanguard 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.

bulletVanguard Small Cap Index Fund Admiral Shares (VSMAX).  E/R: 0.09%.  Initial minimum investment = $10,000.  This fund tracks the CRSP US Small Cap Index.  While its expense ratio is lower than BRSIX and IWC above, the stocks it invests in are nowhere near as small.

bulletVanguard Small Cap ETF (VB).  E/R: 0.09%.  This ETF is a share class of the Vanguard Small Cap Index Fund (NAESX).  However, unlike other ETFs, Vanguard ETFs are only as tax efficient as their underlying fund, no more and no less.  For more information on ETFs, see here.
 
bulletVanguard S&P Small Cap 600 ETF (VIOO).  E/R: 0.15%.  This ETF is a share class of the Vanguard S&P Small Cap 600 Index Fund Institutional Shares (VSMSX).  However, unlike other ETFs, Vanguard ETFs are only as tax efficient as their underlying fund, no more and no less.  For more information on ETFs, see here.

bulletVanguard Russell 2000 Index ETF (VTWO).  E/R: 0.15%.  This ETF is a share class of the Vanguard Russell 2000 Index Fund Institutional Shares (VRTIX).  However, unlike other ETFs, Vanguard ETFs are only as tax efficient as their underlying fund, no more and no less.  For more information on ETFs, see here.

bulletVanguard Small Cap Index Fund (NAESX).  E/R: 0.24%.  This fund tracks the CRSP US Small Cap Index.  The fact that this fund has an ETF share class should make it somewhat more tax-efficient than it otherwise would be.

bulletiShares S&P Small Cap 600 Fund (IJR).  E/R: 0.20%.  This ETF tracks the S&P Small Cap 600 index.  For more information on ETFs, see here.

bulletiShares Russell 2000 Fund (IWM).  E/R: 0.20%.  This ETF tracks the Russell 2000 index.  For more information on ETFs, see here.

bulletiShares Morningstar Small Core Fund (JKJ).  E/R: 0.25%.  This ETF tracks all stocks which Morningstar considers to be "Small Core."  For more information on ETFs, see here.

bulletFocus Morningstar Small Cap Index ETF (FOS).  E/R: 0.12%.  This ETF tracks the Morningstar Small Cap Index.  For more information on ETFs, see here.

bulletFidelity Spartan Small Cap Index Fund - Fidelity Advantage Class (FSSVX).  E/R: 0.30%.  Minimum initial purchase: $10,000.  This fund tracks the Russell 2000 Index of small US stocks.  The fund charges a short-term redemption fee of 1.50% if you sell shares within 90 days of buying them.  This fee, paid directly to the fund, is intended to discourage market timing.
 
bulletWisdomTree SmallCap Earnings Fund (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.  For more information on ETFs, see here.

bulletWisdomTree SmallCap Dividend Fund (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.  For more information on ETFs, see here.
 
bulletPowerShares FTSE RAFI US Small-Mid Portfolio (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.  The relative illiquidity costs of new funds such as this cause us pause at this time.  For more information on ETFs, see here.

bulletSchwab Fundamental US Small-Mid Company Index Fund (SFSVX).  E/R: 0.59%.  This fund tracks the FTSE RAFI 1500 US Small-Mid Index, a non-cap weighted index of US small cap stocks.  The high expense ratio precludes this being a good choice.  Two lower cost share classes are available for higher minimum dollar amounts, but even those are too expensive, given the less expensive small cap choices above.

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:

bulletTo educate the public; and
bulletTo 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, Altruist 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.

 

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