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, the iShares Russell 2000 Index ETF (IWM +1.50%) 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 – nearly 2,000 -- simultaneously. It tracks the Russell 2000 index of small-cap companies.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a very low 0.23 %.
This ETF has a mixed performance record, beating its larger counterpart, the S&P 500, handily over the past decade, but lagging it 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 common, and reasonable, to invest in lots of large-cap companies, as they've typically proven themselves enough to grow large, and tend to have some competitive strengths. But it's also smart to include smaller companies in your portfolio, as the best of them can grow rapidly, as they eventually become large-caps.
More than a handful of small-cap companies had strong performances over the past year. Pharmacyclics (NASDAQ: PCYC), for instance, offers a great example of the potential of small-cap companies, having nearly quadrupled in value over the past year. The company has a very promising cancer-fighting drug, ibrutinib, and other possibilities in its pipeline.
Real estate investment trust (REIT) Omega Healthcare (NYSE: OHI) surged 30%, and offers a 7.5% dividend yield. It's close to a pure play on nursing homes, and stands to benefit as our population ages. In the company's third quarter, funds from operations grew by 27 %, boosted, in part, by acquisitions, and management upped its near-term expectations by a bit .
Parametric Technology (PMTC 0.57%), focused on project design and management software, rose 22%. Its revenue had not been growing briskly until the past year , and its net income recently fell into the red, but its free cash flow is positive and has been growing well. The company has cited softness in Europe and Japan as an issue, but noted a 90% increase in large deals in the Americas over the past year.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Oasis Petroleum (OAS +0.00%), producing oil and gas and focused on North Dakota's Bakken shale, gained just 5%. Its second quarter was strong, and its third-quarter revenue more than doubled . Bears might worry about debt and some insider selling, but there's still a lot to like, such as fast growth and a reasonable valuation .
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.
