Small-Cap Growth Stocks: On a Roll With Room to Run

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small-cap growth stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Vanguard Russell 2000 Growth Index ETF (NYSEMKT: VTWG) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of small-cap growth stocks simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on small-cap growth stocks, sports a relatively low expense ratio -- an annual fee -- of 0.20%. The fund is fairly small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This small-cap growth stocks ETF has underperformed the S&P 500 over the past three years, but it topped its large-cap counterpart handily in 2013. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why small-cap growth stocks?
It's smart to include smaller-company stocks in your portfolio, as the best of these companies can grow rapidly and eventually become large caps. This ETF, focused on small-cap growth stocks, contains components of the Russell 2000 index of small-cap stocks (some of which can be considered mid-caps) that have been growing at a brisk pace.

Lots of small-cap growth stocks had strong performances over the past year. Questcor Pharmaceuticals (NASDAQ: QCOR.DL  ) , for instance, surged 171%, in part on surprising news that it's being bought out by Mallinckrodt for $5.6 billion. Questcor is largely known for its multiple-sclerosis drug Acthar, which has been approved for 19 indications. Some worry that all of Questcor's eggs are in that one basket. On top of that, the company is being investigated for how it has marketed Acthar.

Kodiak Oil & Gas Corporation (NYSE: KOG  ) has recently been trading about 74% above its 52-week low. It's a top operator in the promising Bakken Shale region, and has been boosting its production aggressively, thanks to fracking and other methods. Kodiak Oil & Gas has been boosting production while cutting costs, but some worry about whether North Dakota's proposed slowing of production will hurt Bakken operators. They worry about Kodiak's significant debt load, too.

Other small-cap growth stocks didn't do quite so well over the last year but could see their fortunes change in the coming years. Isis Pharmaceuticals, (NASDAQ: ISIS  ) advanced a solid 40% over the past 12 months. The specialist in orphan drugs has fallen in recent months, with some seeing it as overvalued given its single approved drug, the cholesterol-fighting Kynamro. Still, many are willing to pay up for its shares on the basis of its rich pipeline, which holds a lot of potential, not all of which is likely to be realized. Isis has partnered with lots of bigger pharmaceutical companies, which gives it access to funding but also means it must fork over a portion of profits.

The big picture
If you're interested in adding some small-cap growth stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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  • Report this Comment On April 29, 2014, at 5:36 PM, Ostrowsr wrote:

    The ISIS pipeline and method of drug discovery is not only amazing but their partnerships and patents make it a gatekeeper.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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