By ETF Heat Map Team

The investment industry has seen a huge growth in ETFs (based on net issuance) over the last decade, especially within the last 5 years. Given ETFs have lower costs relative to their mutual fund counterparts, many of them have begun outperforming. One segment that is doing well has been Small Cap ETFs, as there has been a tilt towards companies with smaller market capitalization. We look at couple of Small Cap ETFs that have recently done well below:

  • IWM –  iShares Russell 2000 ETF
  • DES – WisdomTree SmallCap Dividend Fund
  • XSLV – PowerShares S&P SmallCap Low Volatility Portfolio ETF

IWM, the iShares Russell 2000 ETF, is an iShares product that seeks to track the investment results of an index composed of small-capitalization U.S. equities. Approximately 50% of this exchange traded fund is in Information Technology, Financials and Healthcare. It has produced 10% YTD and approximately 225% since inception, while having an expense ratio of only 0.20%.


DES, the WisdomTree SmallCap Dividend Fund, seeks to track the investment results of dividend-paying small-cap companies in the U.S. equity market. Its largest three industries which comprise approximately 40% include Industrials, Consumer Discretionary and Financials. It has a 30 day SEC yield of approximately 3%, an expense ratio of 0.38% and has returned approximately 114% since inception.

XSLV, the PowerShares S&P SmallCap Low Volatility Portfolio ETF, consists of 120 out of 600 small-capitalization range securities with the lowest realized volatility over the past 12 months. It has a 30 day SEC yield of approximately 2.2%, an expense ratio of 0.25% and has returned approximately 15%  average annually since inception. Its largest industry is Financials, which comprise approximately 50% of the entire exchange traded fund.

Many actively managed small cap funds are underperforming their exchange traded counterparts given the fees have been a drag on total returns. Many, not all asset managers, have not been able to justify fees as relative to the investment returns produced, especially in the short run. We personally believe that actively managed mutual funds and exchange traded funds should be considered complementary products in a portfolio. We feel an investor can gather beta exposure with the ETF and gather alpha with the right asset manager (based on asset allocation and security selection by the asset manager).


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