Finding high-quality small-cap stocks requires extensive research. If done properly, you must monitor your portfolio constantly to keep up to date.
It can all get overwhelming for new or even seasoned investors who don’t have the time or knowledge to put in all that effort.
My guide to the best small-cap ETFs in Canada below might help you find a simpler solution.
Small-cap publicly-traded companies are some of the newest companies trading on stock exchanges and are characterized by a market capitalization between $250 million and $3 billion.
Small-cap ETFs are investment vehicles that track the performance of small market capitalization companies listed on stock exchanges.
When you invest in a small-cap fund, the fund manager allocates your investment capital to a group of different publicly listed small-cap companies.
Not all small-cap ETFs take the same approach. Some fund managers follow different market indices and allocate resources to holdings based on the weighting as in the underlying indices.
Comparing Small-Cap ETFs and Other ETF Types
Distinguishing between different ETF types helps investors create a balanced portfolio. Here’s a deeper dive:
- Small-Cap ETFs: They often encompass emerging industries or startups. With higher risk comes the potential for higher rewards. They’re ideal for investors looking for growth opportunities and who can stomach some volatility.
- Mid-Cap ETFs: These represent companies that have moved beyond the startup phase but aren’t yet industry giants. They often offer a blend of growth and stability, making them suitable for those seeking moderate risk levels.
- Large-Cap ETFs: Housing industry titans, these ETFs offer stability. They’re perfect for conservative investors focused on steady returns and dividends.
Qualities Found In The Best Small-Cap ETFs
Here are the qualities that are common among the best small-cap ETFs that I have considered to narrow down my list of the top ETFs available to Canadians in this guide:
- Diversification: An ideal small-cap ETF should provide exposure to a wide array of small-cap stocks, preventing over-concentration in any single sector or stock.
- Low Expense Ratio: Cost matters in ETFs. A low expense ratio means that a smaller portion of your investment returns are being eaten up by management and other fees.
- Liquidity: It’s essential for the ETF to have a decent trading volume, ensuring that investors can buy or sell shares with minimal impact on the price.
- Track Record: Look for ETFs that have a history of tracking their benchmark index closely. A smaller tracking error indicates that the ETF is doing a good job of replicating the performance of the underlying index.
- Reputable Issuer: Stick with ETF providers that have a good reputation in the market. Established players often have more resources to manage their funds efficiently.
- Dividend Yields: Some small-cap ETFs may offer attractive dividend yields, which can provide an additional source of income for investors.
- Low Turnover Ratio: A lower turnover can lead to fewer taxable events, which can be beneficial for investors in taxable accounts.
Pros And Cons Of Small-Cap ETFs
Understanding the pros and cons of small-cap ETFs in Canada might help you make more well-informed investment decisions about whether these assets align with your financial goals and risk tolerance levels.
- Higher growth potential: Small-cap companies are often new companies that offer exciting ideas and have plenty of room to grow, offering the opportunity for higher shareholder returns through capital appreciation.
- Diversification: ETFs offer you exposure to a wide range of small-cap stocks.
- Hidden opportunities: Many analysts and the general public tend to ignore small-cap companies due to their valuations, allowing many diamonds in the rough to be unnoticed.
- Flexibility: Small-cap companies are far more flexible and open to change than their larger counterparts.
- Higher possibility of fraud: Small-cap companies are more susceptible to pump-and-dump schemes.
- Greater volatility: Small-cap publicly-traded companies are more susceptible to volatile market movements.
- Prone to economic changes: Small-cap publicly-traded companies don’t boast the wide economic moats that large-cap companies do. The lack of cash reserves, slow business cycles, or significant downturns in the broader market can devastate small-cap stocks.
Best Small-Cap ETFs In Canada
This section of my guide to the best small-cap ETFs in Canada will list down only the TSX-listed fund and the different US-listed small-cap ETFs that are the most suitable based on the criteria I have described above.
Surprisingly, there is only one TSX-listed small-cap ETF on the market, and the rest below are US-listed small-cap ETFs. Here’s a list of our top picks
- iShares S&P/TSX Small-Cap Index ETF (XCS.TO)
- Vanguard Small-Cap Value ETF (VBR)
- iShares Core S&P Small-Cap ETF (IJR)
- Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
- State Street SPDR S&P 600 Small-Cap Growth ETF (SLYG)
- iShares Russell 2000 ETF (IWM)
- WisdomTree US SmallCap Dividend Fund (DES)
- iShares MSCI EAFE Small-Cap ETF (SCZ)
iShares S&P/TSX Small-Cap Index ETF (XCS) is the only Canada-listed small-cap ETF. BlackRock manages the fund, and it seeks to provide you with long-term capital growth by emulating the performance of the S&P/TSX SmallCap Index.
iShares XCS ETF is one of the costliest small-cap ETFs on this list, and it allocates its entire assets to 235 small-cap Canadian equity securities.
The portfolio can be used to diversify a portfolio of large or mid-cap Canadian equities with exposure to small-cap Canadian equity securities.
2. Vanguard Small-Cap Value ETF (VBR)
Vanguard Small-Cap Value ETF (VBR) is a US-listed small-cap ETF managed by Vanguard. Vanguard VBR ETF seeks to provide you with long-term capital growth by replicating the performance of the CRSP US Small Cap Value Index. The underlying index measures the returns of small-cap value stocks.
Vanguard VBR ETF offers you very low-cost exposure to a diversified basket of small-cap equity securities. The fund manager takes a passively managed approach with VBR ETF, allowing it to keep its expense ratio significantly low.
iShares Core S&P Small-Cap ETF (IJR) is one of the least expensive entries on my list of the best small-cap ETFs in Canada. The fund is managed by BlackRock, and it seeks to provide you with long-term wealth growth by tracking the investment results of an index composed of small-cap US-listed equity securities.
iShares IJR could be used as a core holding for investors seeking long-term growth through capital appreciation. It offers you exposure to small-cap US stocks and takes a low-cost and tax-efficient approach that allows it to boast a very low expense ratio.
4. Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) is a fund managed by Vanguard, and it seeks to provide you with wealth growth by replicating the performance of the FTSE Global Small Cap ex-US Index.
Vanguard VSS ETF allows you to gain diversified exposure to international equity securities outside the US in developed and emerging markets worldwide.
The fund manager uses a passively managed index sampling approach to manage Vanguard VSS ETF.
5. State Street SPDR S&P 600 Small-Cap Growth ETF (SLYG)
State Street SPDR S&P 600 Small-Cap Growth ETF (SLYG) is a fund managed by State Street Global Advisors, and it seeks to provide you with significant wealth growth by tracking the investment results of the S&P SmallCap 600 Growth Index.
The fund manager readjusts the portfolio to include equity securities that show the strongest growth characteristics based on sales growth, earnings change to price, and momentum.
State Street SLYG ETF has a higher MER than many of the other funds listed in this guide.
iShares Russell 2000 ETF (IWM) is another small-cap fund managed by BlackRock. iShares IWM seeks to provide you with investment returns by tracking the investment results of the Russel 2000 Index which is composed of small-cap US-listed equity securities.
Investing in iShares IWM means your capital is spread across 2000 small-cap stocks, providing you with substantial diversification for long-term growth and relatively reduced capital risk. IWM has higher fees than the top picks in this list.
7. WisdomTree US SmallCap Dividend Fund (DES)
WisdomTree US SmallCap Dividend Fund (DES) is a small-cap ETF managed by WisdomTree, and it seeks to provide you with investment returns by tracking the investment results of dividend-paying small-cap equity securities trading in US stock markets.
The fund takes a different approach than most of the others on the list, which focuses entirely on capital appreciation to provide you with returns on your investment.
WisdomTree DES ETF is a more expensive fund to own because it comes with very high expense ratio. However, the additional expense could be worth it because WisdomTree DES ETF offers you potential wealth growth through capital appreciation and shareholder dividends.
iShares MSCI EAFE Small-Cap ETF (SCZ) is another US-listed small-cap fund managed by BlackRock. iShares SCZ ETF seeks to provide you with investment returns by tracking the investment results of internationally diversified small-cap equity securities trading in Europe, Australia, Asia, and the Far East markets.
You can use iShares SCZ ETF to diversify your portfolio through exposure to internationally diversified equity securities in various developed international stock markets. The fund comes has high fees compared to others on this list.
How To Buy The Best Small-Cap ETFs In Canada
The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:
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To learn more, check out my full breakdown of the best trading platforms in Canada.
Small-cap ETFs undoubtedly entail more market risk compared to large-cap ETFs. However, history has shown that investors who have the stomach to bear the short-term volatility can be rewarded with stellar shareholder returns in the long run.
If you are new to investing and you want to go with an aggressively-tilted portfolio, the right small-cap ETFs can be an excellent starting point for you to consider, provided that you understand the risk and reward with this type of strategy before you decide to invest.
The energy sector has historically been an excellent long-term performer. Check out my guide to the best energy ETFs in Canada to learn more.