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Investment Profile

Investment Profile: Small But Mighty

  • Small But Mighty gives investors exposure to small-cap stocks
  • Assets from smaller companies are riskier, as they have higher volatility
  • Higher volatility means higher potential returns (and potential losses)
3 min read

People like to root for the underdog.  And that goes for the investment world too, where people like to discover businesses that can turn into the next big thing, after modest beginnings.

Plenty of small companies punch above their weight. And if you’re an investor, you might want to consider companies like this.

Some of history’s biggest underdogs became juggernauts after overcoming the odds — Amazon.com began selling books online and today is one of the largest e-commerce companies in the world, with a market cap of more than $700 billion. Before Facebook reached a user base of 2 billion, it started with a just a few friends in a college dorm room.

Harnessing the power of the underdog, and ‘punching above your weight’, is the key concept behind Small But Mighty (ticker: VB), an exchange-traded fund (ETF) available on Stash.

What’s in the fund?

Small but Mighty is Stash’s name for the Vanguard Small-Cap ETF (VB).

And as you might suspect, all of the fund’s assets are small-cap stocks, which are shares of small companies. Small-cap stocks, traditionally, are shares of companies that are worth less than $1 billion.

The fund tracks the CRSP US Small Cap Index, and provides investors with broad exposure to companies in numerous industries, including consumer goods and services, financial services, healthcare, industrials, oil and gas, and technology.

Small but Mighty (VB) includes stocks from more than 1,400 small companies. While some are familiar names, others are promising under-the-radar firms, according to the prospectus.

Among the fund’s largest holdings are companies such as Nektar Therapeutics, Diamondback Energy, Spirit AeroSystems, and TransUnion. But it also includes stocks from companies such as alternative energy company First Solar, online food ordering company Grubhub, and online real estate listings company Zillow.

Performance

The fund, managed by Vanguard, launched in 2004.

Backed by a strong economy and recent record-setting stock growth, the fund has posted strong returns since 2008, the beginning of the financial crisis. Since then, the fund has had six years of returns higher than 16%, finishing up 16.26% in 2017, according to Morningstar.

In 2013, Small But Mighty’s, returns for the fund increased 37.7%.

Recent market volatility, however, has put a damper on this year’s returns. Year-to-date (as of month, 2018), the fund is down -0.29%. The fund’s last down year was 2015, when its annual return was -3.76%.

Are there similar funds?

Numerous funds focus on small companies.

For example, the iShares S&P SmallCap 600 Index (ticker: IJR) also provides exposure to U.S. small-cap stocks by tracking the S&P SmallCap 600 Index. Like Small But Mighty, IJR, which was launched in 2000, has had its ups and downs. But over the past eight years, its returns have increased dramatically.

Like Small But Mighty, IJR has seen annual returns of more than 16% five out of the past ten years. It was up 13.15% in 2017, and year-to-date (as of April 2018), is outperforming Small But Mighty with a 0.57% return, according to Morningstar.

Risks and considerations

You may be inclined to root for the little guy, but that doesn’t come without potential downsides. While small-cap assets, like those contained in Small But Mighty, have enormous potential, they also can be more volatile, which means there’s more risk. Unlike blue-chip companies, which have long track records of revenue and profits, small-caps tend to be less tested.

For that reason, this fund may be an investment that’s more tailored toward aggressive or moderate investors.

The fund’s risk, however, is spread across a broad range of assets–in numerous industries and more than 1,400 companies. While that provides some level of diversification, the fund is also almost completely comprised of stocks, which is another layer of risk to consider.

The fund’s expense ratio is 0.06%, which is 95% lower than the average for similar funds, according to Vanguard.

By Stash Team

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