Low-Cost, Small-Cap, and Lots of Room to Grow

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 hand-pick a few, the iShares Morningstar Small Core Index ETF (NYSEMKT: JKJ  ) 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 iShares ETF's expense ratio -- its annual fee -- is a low 0.25%. The fund is fairly 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 has performed reasonably, outperforming the S&P 500 over the past three and five years. 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. Mortgage insurer MGIC Investment (NYSE: MTG  ) has seen its stock surge some 700%. The company posted surprisingly good earnings recently, with a modest gain instead of an anticipated sizable loss. It also reported a big 36% jump in new insurance written, enjoying the rebounding housing market. Still, the company is not without risk, dealing with debt, facing rising interest rates, and in an industry with a murky future.

Brunswick (NYSE: BC  ) , focusing on boats, fitness, and bowling equipment, surged 78%. The company recently reported reasonably strong earnings, with revenue up 4% and operating income up 9%, though net income was down 4%. (Net income was up 6% over the first six months of the fiscal year.) Management boosted their performance expectations for the year, too.

Manitowoc (NYSE: MTW  ) , a maker of cranes and food-service equipment, gained 66%. It posted strong second-quarter results in July, partly on a lower tax rate, coupled with rising profit margins on its cranes. It also sports a healthy backlog of orders. Though the food-service industry has shown signs of growth, Manitowoc's food-service segment hasn't been growing as briskly as its crane division.

JDS Uniphase (NASDAQ: JDSU  ) Uniphase advanced 44%. It disappointed investors in its third quarter and has been rather volatile, so its upcoming report is of great interest to investors. On the plus side, its book-to-bill ratio has been strong, suggesting that it has plenty of work, and bulls are hopeful about growth prospects in Asia, and about fiber-optic demand. Bears don't like the "anemic" sales they've seen. The company's fortunes are significantly tied to the telecom industry, for which it makes equipment.

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 isn't the only ETF that might pique your interest. You can learn about some other ETFs that have great promise for delivering profits to shareholders in The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.


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