Here’s another sample chapter from my latest book Exchange-Traded Funds Investing For Beginners.  The book has been well received, so I’ll, post a number of excerpts for your review in future posts.

And if it interest you, you can review the book for free right here.

We’ve been previewing the chapter entitled Different Types Of ETF Investments.  And in our latest posts we have looked at ETFs holding large companies stocks (large caps).  These companies typically have well established products and a well-established financial history.

However, their big growth days may be behind them.  And so the value of their stock may be less volatile, swing up and down less, be more stable and less heart stopping.  So investing in them is less risk, but perhaps less reward.

Small US Companies Stock ETFs (Small Cap)
On the other hand, people can invest in smaller, newer companies.  And they do that because their big growth days could still be ahead of them.  Of course, they don’t have as much of an established track record yet, and some may eventually go out of business.  So, their stock price will be more volatile, which reflects these real risks.

So why would anyone put up with that?

Well, because the future payoff for some of them may be great.  After all, think of Apple and Google, because they were small companies once.  And early investors that bought and held on to their stocks made a fortune.

So small cap stocks offer higher growth potential.  And better yet, small cap ETFs have outperformed the S&P 500 (big stocks) in the long run.

So more risk, more reward.  That’s interesting, so let’s have a look at some of the small cap ETFs, for investors willing to accept more risk for higher potential gains.  We’ll start with Vanguards Small-Cap 600.

VIOO – Vanguard S&P Small-Cap 600 Index Fund ETF
Investing in the VIOO is investing in small companies in the US stock market.  There are 607 stocks in the fund.

As mentioned, people invest in small companies because they are betting they have a big future ahead of them.  And some companies can eventually pay off big.  For example, Microsoft and Amazon were once small companies.  But remember that others can go bust at this early stage.  So investments in small companies can be volatile and a bit scary, with a bumpy ride not for the faint of heart.

But buying over 600 of them in an EFT gives diversification, which helps even out the ride a bit.

Small stocks can be further broken down into growth and value.  The growth stocks are hot, prices move a lot and they probably cost a lot.  The value stocks will not be so popular, hot, pricey and volatile.  But they give good value for the price.

VIOO is a blend of both of these types of stocks.  So buying VIOO gives you some small growth stocks and some small value stocks.

The ETF follows the S&P Small Cap 600 index.  And it pays a 1.50% dividend which is about average.  And it has a fairly low net expense ratio of 0.10%.

So it pretty much represents many small stocks in the market, both growth and value, is low cost, and pays a dividend.  And it’s been around since 2010, so it’s fairly well established at this point.

You can think of investing in the VIOO as getting in on the exciting action of small stocks with some risk protection of diversification to smooth out the ride, although it will still be bumpier than ETFs of large stocks.

Indexed to: S&P Small Cap 600 index

Expense Ratio: 0.10%

Total Assets: $4.3 billion

Annual Dividend Yield: 1.50%

P/E ratio: 5.56

Fund Inception: 09/07/2010

Top Holdings:

• AIT         Applied Industrial Technologies, Inc.
• PSC        SPS Commerce, Inc.
• ATI         ATI Inc.
• EXPO     Exponent, Inc.
• FIX         Comfort Systems USA, Inc.
• ABG       Asbury Automotive Group, Inc.
• ENSG    The Ensign Group, Inc.
• RMBS    Rambus Inc.
• ASO       Academy Sports and Outdoors, Inc.
• FN         Fabrinet

So that’s the VIOO, the Vanguard S&P Small-Cap 600 Index Fund ETF.

In our next post, we’ll look at another small cap stock ETF for those interested in high potential for investment growth.  It has over 1300 stocks, twice as many, as the VIOO.  So you’ll want to check it out when we post it.

And if you found this sample chapter interesting, you can check out more in our latest book Exchange-Traded Funds For Beginners for free right here.