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 SPDR S&P 600 Small Cap ETF (SLY +0.00%) 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 SPDR ETF's expense ratio -- its annual fee -- is a very low 0.20%. The fund is a bit on the small side, 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 well, handily beating 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 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. 3D Systems (DDD 2.21%), for example, surged 110%, but it's been a bumpy ride for investors. Its last earnings report featured big double-digit growth rates, but that wasn't enough for some, who expect huge things from the 3-D printing industry – including even health-care-related printing (new body parts, anyone?).
Hain Celestial (HAIN +0.59%) popped 34%, rewarding my socially conscious colleague Alyce Lomax, who added it to her portfolio. The organic food maker is expanding into the promising "Big Yogurt" market via an acquisition, and its acquisitions have been performing well.
Align Technology (ALGN 2.59%) gained 23%. It's behind the fairly well-known Invisalign dental aligner, as well as various CAD/CAM software, and its last earnings report was strong, featuring revenue up 11%. It beat analyst expectations, as well. Analysts at Zacks upgraded the stock recently.
Other companies didn't do quite as well last year, but could see their fortunes change in the coming years. Cubist Pharmaceuticals (CBST +0.00%), for instance, gained 8%. Its 2012 revenue gained 23% over 2011, and EPS surged 304%. It has several products on the market, and several more nearing the end of clinical trials. It has also acquired the right to buy in-development pain medication Adynxx, as well as global rights to an antibiotic candidate.
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.
