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, the iShares Russell 2000 Growth Index ETF (IWO +0.63%) 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. It tracks the Russell 2000 index of small-cap growth 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 0.25%.
This ETF has performed well, handily outpacing the S&P 500 over the past three, five, and 10 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 and eventually become large caps.
More than a handful of tiny growers had strong performances over the past year. And I mean strong. Pharmacyclics (NASDAQ: PCYC), for instance, has soared 255% over the past year. The company has a very promising cancer-fighting drug, ibrutinib, which recently received the new "Breakthrough Therapy" designation from the FDA. It has other possibilities in its pipeline as well. On the downside, it has been issuing more shares and diluting the value of existing shares. If one or more of its drugs is a big hit, however, that won't be such a big concern.
3-D printing specialist 3D Systems (DDD +2.04%) surged 185%, reporting "a corporate home run" in its third quarter. It reports its fourth quarter next week. Some worry about cutbacks in military or industrial spending, but there's also a promising consumer market, which might end up printing food, of all things. (Some worry that 3D is now overvalued , too.) There's also speculation that 3D or another peer will buy the promising private rival MakerBot.
Real estate investment trust (REIT) Omega Healthcare (OHI +0.13%) increased 38% and offers a 6.5% dividend yield. It's close to a pure play on nursing homes and stands to benefit as our population ages. In 2012, the company's revenue from operations rose 20%, funds from operations advanced 29%, and net income more than doubled. Management expects to spend $200 million on investments in 2013, and has lowered its cost of borrowing. Some worry, though, that health-care reforms will pressure the company to cut costs more.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. PTC (PMTC +0.91%), formerly known as Parametric Technology, shed 11%. In its recently reported first quarter, the company beat EPS estimates, with revenue up slightly and costs down slightly. Management noted that, "While the slowdown in the global manufacturing industry and uncertainty about the near-term economy remains a headwind for revenue growth, we remain committed to driving operating margin expansion..."
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.
