Good Things Can Come in Small Packages

Small Cap Stocks are an Opportunity for Growth

All of the companies I worked for during my years in business and managing information technology teams were small companies. There are several benefits that a small company has over much larger companies. Often small companies are less complex and can be more collaborative and visionary. In fact, all of the companies we now know as the giants were small companies when they started. Many started in a garage, a home office, or with a single store. McDonald’s was a business like that. So were Microsoft and Ford. Remember that even our favorite fast-food place, Culver’s, started with a single restaurant. Sadly, you can’t buy shares in Culver’s.

Picking the Best Small Company is Very Difficult

For most investors, it makes little or no sense to buy individual small cap stocks. Therefore, the best choice is usually a good low-cost small cap ETF. Sadly, far too many investors pick bond funds over small cap investments. Others have a dangerously high allocation to the top ten major companies in the S&P 500 index. This has been seen in many investment portfolios during this bear market.

Investing Pebbles Can Become a Highway for Growth

To be fair, small cap companies and small cap ETFs have also struggled during this time of high inflation, uncertainty, rising interest rates, and the growling bear market. So investing in small cap stocks will not protect you from systemic market issues. On the other hand, some exposure to small cap stocks greatly increases an investor’s diversification in a section of the economy that can be more nimble when costs are rising. That isn’t to say that small businesses don’t have challenges when it comes to rising inflation, but the managers of those businesses can usually see more closely what is going on and make decisions and changes more quickly.

Two Good Small Cap ETFs

I can suggest two possible small-cap ETFs for every investor. One is the iShares Core S&P Small-Cap ETF (IJR) and the other is Vanguard Small-Cap Value ETF (VBR). Remember this: there are far more small companies than there are large companies. Therefore, it is best to look for a mix of small cap ETF investments with low expenses, dividend growth, and good ten-year performance. I believe IJR and VBR meet those criteria.

Dividend Growth is more important than Dividend Yield. But also pay attention to long-term price performance.
Quality Matters when buying any investment. Expenses also matter.

Full Disclosure

While I don’t own either of these ETFs, I have a significant investment in small cap companies. Many of them are BDCs and REITs. I looked at the top ten holdings in both of these ETFs and I recognized many of the names of the companies. That is encouraging.