In this article we present the list of 10 Best Performing Small-cap ETFs in 2023. Click to skip past our analysis of small-cap stocks and ETFs and go straight to the 5 Best Performing Small-cap ETFs in 2023.
Axon Enterprise, Inc. (NASDAQ:AXON), Alarm.com Holdings, Inc. (NASDAQ:ALRM), and Embraer S.A. (NYSE:ERJ) are a few of the small-cap stocks that are major holdings in some of the best performing small-cap ETFs this year.
The top small-cap ETFs haven’t been able to crack the Top 10 Best Performing ETFs of 2023, which is headlined by several tech-focused ETFs, including ARK Investment Management’s Ark Fintech Innovation ETF (ARKF), which has gained 45.9% this year. To check out some of the hottest ETFs in this sector, don’t miss the 10 Best Semiconductor ETFs.
Nonetheless it has been a decent year for small-cap stocks and the ETFs that are focused on them, as the Russell 2000 Index has posted gains of 6% this year. Those year-to-date gains were as high as 14% a little over a month ago, but small-cap stocks were dinged heavily in the first-half of August, contributing to more than half their gains being wiped out.
The longer-term outlook for small-cap stocks looks far more promising, which could make small-cap focused funds among the best ETFs to buy and hold for the long term. Bank of America Securities encouraged investors to begin adding small-caps to their portfolios heading into 2023, with the firm projecting that small-caps will grow at a 12% annual rate over the next decade compared to just 5% growth for the S&P 500.
Given the volatile nature of investing in individual small-cap stocks, it makes far more sense for investors to seek out indexes of those companies, giving them some added stability through strength in numbers while still retaining the upside growth potential that small-caps possess. If you’re interested in other great portfolio diversification options, check out the 20 Biggest ETFs by Volume.
The strong performance of 2023’s best performing ETFs has certainly renewed the interest in them among the investing community. ETF net flows (the difference between inflows minus outflows) was a relatively muted $80 billion in Q1, but that figure jumped to $130 billion in the latest quarter. Actively managed ETFs captured a much larger percentage of that flow, at about 17%, than its overall representation in the ETF marketplace, which stands at a paltry 6%.
Given that many of the best Performing ETFs have been tech-focused (check out the 10 Best Performing Technology ETFs in 2023), a good deal of those flows were directed towards tech sector ETFs, though the consumer discretionary and communications services sectors pulled in slightly higher flows during Q2. On the other hand, investors were bailing on ETFs in the energy, materials, and real estate sectors.
Let’s now dig into the 10 Best Performing Small-cap ETFs in 2023 and look into some of the most prominent small-cap stocks being held by those funds.
10 Best Performing Small-cap ETFs in 2023
myriam-jessier-eveI7MOcSmw-unsplash
Our Methodology
The following data is gathered from a leading ETF screener that was filtered to only include small-cap focused ETFs (though some of them do also contain mid-cap companies). The ETFs have been ranked in ascending order based on their year-to-date returns. Holdings data was taken directly from each ETF’s information page on that fund manager’s website.
All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q2 2023 reporting period. We follow hedge funds like ARK Investment Management because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
10 Best Performing Small-cap ETFs in 2023
10. Roundhill Acquirers Deep Value ETF (DEEP)
Year-to-Date Returns: 11.7%
Embraer S.A. (NYSE:ERJ), Axon Enterprise, Inc. (NASDAQ:AXON), and Alarm.com Holdings, Inc. (NASDAQ:ALRM) are the top holdings of three of the five best performing ETFs among small-cap-focused funds. WW International, Inc. (NASDAQ:WW) is likewise the top holding of the tenth-best performing small-cap ETF so far this year, the Roundhill Acquirers Deep Value ETF (DEEP).
The small-cap value equities fund, which aims to invest in small, highly undervalued U.S. stocks, has 102 holdings, with WW International, Inc. (NASDAQ:WW) carrying the highest weighting in the portfolio at 1.38%. DEEP is one of the smaller ETFs on this list, with $41.4 million in assets under management. It’s returned nearly 12% this year, but is down slightly over the previous five years.
WW International, Inc. (NASDAQ:WW), formerly known as Weight Watchers, sank to a five year low in hedge fund ownership during the final quarter of 2022, but several hedge funds have built new stakes in the company in 2023, including Richard Driehaus’ Driehaus Capital and Steve Cohen’s Point72 Asset Management. The weight loss management company had 4.1 million subscribers at the end of June, with the company achieving year-over-year subscriber growth during the quarter for the first time since late 2020.
9. First Trust Multi-Manager Small Cap Opportunities ETF (MMSC)
Year-to-Date Returns: 13.4%
The First Trust Multi-Manager Small Cap Opportunities ETF (MMSC) is tied for the smallest ETF on this list in terms of assets, with $7 million. While the fund has posted nice gains this year, it’s still down by 21% since its inception in October 2021. The fund utilizes a multi-manager approach to increase diversification in its portfolio construction, with an overall emphasis on small-cap growth stocks.
MMSC’s top holding with 2.37% portfolio weighting is Celsius Holdings, Inc. (NASDAQ:CELH), a Florida-based beverage company that ranks as one of 10 Vegan Stocks Billionaires Are Loading Up On. In addition to its core line of fitness and energy drinks, Celsius Holdings, Inc. (NASDAQ:CELH) also offers sugar-free and kosher beverages. The company is growing sales rapidly, topping $200 million in quarterly sales for the first time ever in Q1, which then jumped to over $300 million in Q2, a 112% year-over-year rise. Celsius had the #3 energy drink brand in the U.S. for the one-year period ended June 18, having doubled its market share to 8.6% over the past year.
Carillon Tower Advisers discussed some of Celsius Holdings, Inc. (NASDAQ:CELH)’s positive catalysts last year in the fund’s Q3 2022 investor letter:
“Celsius Holdings, Inc. (NASDAQ:CELH) develops, markets, sells, and distributes functional fitness and lifestyle beverages. The company’s shares outperformed in the period as it was announced that a major global soft drink company would take a minority ownership stake in the company in a deal that also would involve a strategic distribution agreement. In addition, Celsius reported a strong quarter, and it continues to gain market share in the energy drink category.”
8. Invesco S&P MidCap 400 Revenue ETF (RWK)
Year-to-Date Returns: 13.9%
The Invesco S&P MidCap 400 Revenue ETF (RWK) is a small- and mid-cap oriented ETF with $519 million in assets under management. The fund has 398 holdings and an expense ratio of 0.39%. The fund also utilizes a unique weighting system to organize its portfolio, basing its construction on companies’ top line revenue rather than their market cap.
Given that, its top holding TD SYNNEX Corporation (NYSE:SNX), at 2.95% weighting, likely has extremely impressive revenue in relation to most other companies in the ETF, given its weighting is more than double that of all but six other stocks. There was a huge spike in hedge fund ownership of TD SYNNEX Corporation (NYSE:SNX) in the first quarter of this year, as it jumped by 70% to an all-time high. However, smart money ownership of the stock fell back sharply in Q2.
TD SYNNEX Corporation (NYSE:SNX)’s Q2 results were certainly impressive for a smaller company, as it hauled in $14.1 billion in net revenue and $18.7 billion in gross billings, though each of those figures was down from a year earlier, by 7% and 4% respectively. The IT services company’s End Point Solutions have been impacted by the post-pandemic weakness in PC sales, though the company believes it has now reached the trough in terms of billings and sales, with demand expected to pick up in future quarters.
7. Vanguard Small Cap Growth ETF (VBK)
Year-to-Date Returns: 14.0%
The Vanguard Small Cap Growth ETF (VBK) is a passively managed fund of small-cap growth stocks that has an attractive expense ratio of just 0.07%. When coupled with its broad selection of stocks (exactly 1,000 holdings as of writing), it’s a great option for investors looking to diversify their portfolios. The fund has $14.2 billion in assets under management, more than twice as much as any other fund on this list, which speaks to how appealing it is to investors.
The ETF’s top stock pick with a 0.93% weighting is credit ratings agency and analytics company Fair Isaac Corporation (NYSE:FICO). FICO jumped to an all-time high in hedge fund ownership during Q2, with 35% more money managers going long FICO over the last three quarters. Fair Isaac Corporation (NYSE:FICO) delivered record revenue of $399 million in the company’s fiscal Q3 2023, up 14% year-over-year. Revenue from mortgage originations was particularly strong during the quarter, rising by 135% from a year earlier.
Baron FinTech Fund is bullish on the long-term earnings outlook for Fair Isaac Corporation (NYSE:FICO) as the fund shared in its second quarter 2023 investor letter:
“Shares of Fair Isaac Corporation (NYSE:FICO), a data and analytics company that helps predict consumer behavior, contributed to performance. The company reported solid quarterly financial results and modestly raised its full-year outlook while taking a more conservative approach to guidance due to macroeconomic uncertainty. CEO Will Lansing sounded confident that the business can hold up well across various macro backdrops and sounded particularly excited about the momentum in the software business. We retain conviction and believe that FICO will be a steady earnings compounder, which should drive solid returns for the stock over the long term.”
Closing out the first half of the list of best performing ETFs is iShares Morningstar Small-Cap Growth ETF (ISCG), which sports a paltry 0.06% expense ratio. The fund targets U.S.-based small-cap companies which are projected to deliver above market rate earnings growth. It held an even 1,500 stocks as of writing, lead by Saia, Inc. (NASDAQ:SAIA) at 0.59% weighting.
Hedge funds bailed on Saia, Inc. (NASDAQ:SAIA) in the third quarter of last year but came storming back into the stock during the second quarter of this year, as there was a 40% jump in the number of smart money managers long SAIA. The transportation company has seen falling demand in recent quarters due to the soft economic backdrop, but did note in its Q2 conference call that demand showed continued improvement throughout each month of the second quarter and was trending towards positive growth territory in July.
The Artisan Small Cap Fund found several reasons to add to its Saia, Inc. (NASDAQ:SAIA) holding in Q2, as the fund outlined in its second quarter 2023 investor letter:
“Along with Exact Sciences, notable adds in the quarter included Twist Bioscience, Saia and Crocs. Saia, Inc. (NASDAQ:SAIA) operates in less-than-truckload shipping, a relatively attractive part of transportation that features several solid franchises supported by real estate assets and network advantages. Saia has been opening new terminals across the Northeast, raising its terminal count from 151 at the end of 2016 to 187 as of Q4 2022. With its Northeast expansion largely complete, Saia is entering a new growth phase that should unlock additional operating leverage. Thanks to a strengthened delivery network that enables higher quality service levels to customers, we believe Saia can simultaneously grow at a healthy pace and realize higher prices. We are cognizant that the slowing economy could reduce industry (and Saia’s) shipment volumes, but we have added to the position given its reasonable valuation, signs that shipping volumes are troughing and resilient pricing.”
See which of this year’s best performing ETFs were holding Embraer S.A. (NYSE:ERJ), Axon Enterprise, Inc. (NASDAQ:AXON), Alarm.com Holdings, Inc. (NASDAQ:ALRM), and others by clicking the link below.
