iShares Russell 2000 Index (ETF) (IWM), Vanguard Small Cap ETF (VB), iShares S&P SmallCap 600 Index (ETF) (IJR): Do You Avoid Small Caps? Think Again!

The ETFs representing the small-cap stocks are iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), Vanguard Small Cap ETF (NYSEARCA:VB) and iShares S&P SmallCap 600 Index (ETF) (NYSEARCA:IJR). The large-cap universe is represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

Source: Yahoo! Finance.

Not surprisingly, all of the small-cap ETFs exhibit higher volatility than the large-cap one. This shows that the volatility most investors fear is real.

However, the rewards are great, too. The flip side suggests that the small-cap ETFs have outperformed the large caps almost on a regular basis (remember, I said that small caps lead the overall market sentiment). The following chart confirms the same.

Source: Yahoo! Finance.

Over this period of time, the small caps have returned handsome profits to their investors — even more than the large caps.

While there are a number of ETFs available to give you exposure to the small-cap space, the three above-mentioned ETFs are my favorites, as they provide a small-cap pure play and are the most popular among investors.

IWM is probably the biggest and most well-known product in this segment. It tracks the Russell 2000 Index and charges investors just 20 basis points in fees and expenses. Its massive asset base of $24.11 billion speaks volumes about its popularity. It has gained about 27% in the past year and pays out a dividend yield of about 1.7%.

IJR was launched in May of 2000 and tracks the performance of the S&P Small Cap 600 Index. It manages an asset base of $11.56 billion. The ETF follows a more selective stock-picking technique and tracks the performance of 600 stocks. The ETF charges an expense ratio of 0.17% and has returned about 28% in the past year.

Compared to these two, VB provides an extremely low cost structure. It charges just 10 basis points in fees and expenses, and it has returned an impressive 27.5% over the last year. VB manages an asset base of $7.11 billion and pays out a dividend yield of 1.5%.

There’s no doubt that the U.S economy has come a long way since the 2008 financial crisis and is treading the path of recovery. An improving labor market, a rise in consumer sentiment, and the recovery of the housing market surely point toward a recovering economy and are bullish signs for small caps going forward. And these ETFs are diversified and generic ways to play the segment effectively.

The article Do You Avoid Small Caps? Think Again! originally appeared on Fool.com.

Ankush Shaw has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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