A Basket of Promising Small-Caps

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 stocks to your portfolio, but don't have the time or expertise to handpick a few, the Guggenheim Russell 2000 Equal Weight ETF (NYSEMKT: EWRS  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is a relatively low 0.41%. The fund is very small, too, 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 ETF is too young to have a sufficient track record to assess, but for the curious, it underperformed the S&P 500 in 2012, and is ahead of it so far this year. 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 caps?
It's smart to include smaller companies in your portfolio, as the best of them can grow rapidly, and eventually become large caps.

More than a handful of small-cap companies had strong performances over the past year. SUPERVALU (NYSE: SVU  ) surged 200%. The company has suspended its dividend, in order to cut costs and more effectively compete in its low-margin industry, where it also faces growing competition from Wal-Mart and other discounters. Some rivals such as Whole Foods Market have been able to maintain higher margins by offering organic produce and higher-end products. SUPERVALU has been reshaping itself and selling off some brands, and apparently many investors are hopeful.

Boulder Brands (NASDAQ: BDBD  ) gained 38%, and though you may think you don't know the company, it used to be Smart Balance until recently, and sports healthy-leaning brands, such as Smart Balance, Udi's, Glutino, Earth Balance, and Best Life. (The company is based in New Jersey, not Colorado, too.) Boulder recently bought 80% of GlucoBrands, owner of Level Life Foods, which specializes in blood-sugar-managing products such as bars and shakes. Boulder Brands is free-cash-flow positive and enjoying double-digit revenue growth.

Diamond Foods (NASDAQ: DMND  ) advanced 17%, posting a surprising gain instead of an expected loss in its last quarter. Some have worried about a drop in nut sales, and view the company as a possible acquisition target, while others think the company might want to do some shopping of its own. Diamond is also recovering from accounting-related troubles, and a new possible worry is the FDA looking into why salmonella has been turning up in nuts recently.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Dietary supplement maker Star Scientific (NASDAQ: RCPI  ) sank 60%, with some investors worried about persistent net losses and even scandals. In its last quarter, the company blamed its growing losses on increased sales efforts, and also noted significant legal costs related to investigations and class-action lawsuits. Bulls noted solid sales growth for its inflammation-treating supplement, Anatabloc.

The big picture
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.

This is not the only ETF worth considering. I invite you to check out The Motley Fool's special free report, "3 ETFs Set to Soar," to learn more about a few ETFs that have great profit-delivering potential for shareholders. Just click here to access it now.


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