- The oldest available U.S. Small Cap Growth ETF has outperformed an S&P 500 index fund by 3.93% CAGR over the last 18 years
- There are currently 17 ETFs available in the Morningstar category called Small Cap Growth. Seven of these funds have inception dates that are 10 years old or older
- An allocation to Small Cap Growth in a worldwide equity portfolio can add growth and diversity
The U.S. Small Cap Growth asset class has data readily available going back to 1972. During the last 46 years, this asset class has done very well, but it did trail U.S. Large Cap Blend (S&P 500) by 0.39% CAGR. This should not dissuade investors from this asset class. During shorter periods, such as 5-, 10- or 15-years, Small Cap Growth can and has outperform the S&P 500 significantly.
U.S. Small Cap Growth vs U.S. Large Cap Blend: January 1972 – October 2018
Source: https://www.portfoliovisualizer.com/
The oldest available Small Cap Growth ETF is the iShares S&P Small-Cap 600 Growth ETF (IJT). This ETF has outperformed an S&P 500 index fund by nearly 4% CAGR over the last 18 years. That kind of outperformance would have turned a $10k investment into $51k as compared to an S&P 500 fund which produced $26k during the same timeframe.
IJT vs S&P 500 index fund: August 2000 – October 2018
Source: https://www.portfoliovisualizer.com/
IJT vs SPY: July 28, 2000 – November 14, 2018
Source: https://www.koyfin.com/home
Currently, there are 17 ETFs available in the Morningstar category called Small Cap Growth. Seven of these funds are 10 years old or older. I have compared each of these funds head-to-head utilizing the back-testing tools at Portfolio Visualizer and Koyfin. I did not consider quality, net asset values, trading volumes or suitability in this comparison. The only criteria used was total returns.
Source: https://www.morningstar.com/ 11-14-2018
The top 4 Small Cap Growth funds were IJT, RZG, SLYG & VBK. The top 3 funds were so close in returns that their rankings can change daily. Since they perform so similarly it would be wise for potential investors to consider expense ratios or commission-free trading at their brokerage as a deciding factor between them. Next, let’s look at the performance of these funds over the past 12+ years.
IJT vs RZG vs SLYG vs VBK vs SPY: March 7, 2006 – November 14, 2018
Source: https://www.koyfin.com/home
IJT vs RZG vs SLYG vs VBK: April 2006 – October 2018
Source: https://www.portfoliovisualizer.com/
Next, we’ll look at the stated objectives and product details of each of the top 4 Small Cap Growth ETFs.
IJT – The iShares S&P Small-Cap 600 Growth ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities that exhibit growth characteristics. Exposure to U.S. small-cap stocks of companies whose earnings are expected to grow at an above-average rate relative to the market. Low cost and tax efficient. Use as a complement to a portfolio’s core holdings. (Best Long-Term Performance, Lowest Volatility)
RZG – The Invesco S&P SmallCap 600® Pure Growth ETF (Fund) is based on the S&P SmallCap 600® Pure Growth Index (Index). The Fund will invest at least 90% of its total assets in securities that comprise the Index. The Index measures the performance of securities that exhibit strong growth characteristics in the S&P SmallCap 600® Index. Growth is measured by the following risk factors: sales growth, earnings change to price and momentum. The Fund and the Index are rebalanced annually. (Lowest P/E Ratio, Lowest Correlation to Broad U.S. Markets)
SLYG – The SPDR® S&P® 600 Small Cap Growth ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® SmallCap 600 Growth IndexSM (the “Index”). The selection universe for the S&P SmallCap 600 Index includes all U.S. common equities with market capitalizations generally between $450 million and $2.1 billion at the time of inclusion. The Index includes stocks that exhibit the strongest growth characteristics based on: sales growth; earnings change to price; and momentum. (Highest Dividend, Best 5-, 10- & 15-Year Performance)
VBK – Vanguard Small-Cap Growth ETF – Seeks to track the performance of the CRSP US Small Cap Growth Index, which measures the investment return of small-capitalization growth stocks. Provides a convenient way to match the performance of a diversified group of small growth companies. Follows a passively managed, full-replication approach. (Lowest Expense Ratio, Most Diversified, Lowest Turnover Ratio)
Because the top 4 Small Cap Growth ETFs have very similar performance, I will show each of these ETF’s comparisons with each other.
IJT vs RZG: March 7, 2006 – November 14, 2018
Source: https://www.koyfin.com/home
RZG vs SLYG March 7, 2006 – November 14, 2018
Source: https://www.koyfin.com/home
SLYG vs VBK January 30, 2004 – November 14, 2018
Source: https://www.koyfin.com/home
The U.S. Small Cap Growth asset class is a great way to add growth exposure an equity portfolio. All 4 of the best performing funds in this category are worth considering. If you plan to add one of these funds to your portfolio, please study the expense ratios, tax efficiency and whether the fund you select will trade commission-free at your brokerage, before investing.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of IJT and we intend to buy more shares in the future. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.
Previous Deep Value ETF Accumulator article on the U.S. Small Cap Growth asset class: AUGUST 28, 2017 Best Long-Term Performance U.S. Small Cap Growth ETFs