Top Ranked Small Cap Growth ETF in Focus: VTWG - ETF News And Commentary

Though the U.S. markets performed reasonably well during the final quarter of 2013, they lost strength in the first quarter of this year. Beginning of the end of the era of cheap money, emerging market turmoil, concerns over slowdown in China, the second largest economy and geo-political crises in Russia dampened spirits (read:

).

However, the chilly U.S. weather was deemed to be the main spoilsport for the slowdown in the broader economy in the first quarter. Things are expected to turn around this quarter with the economy returning to health. The recent in line Jobless Claims and Trade Deficit data point towards the improving tone in economic activity.

Along with this the strengthening job market, rebounding auto sales and increasing consumer spending all signal toward improving domestic strength. Given the improving domestic market, smaller companies are expected to be the primary beneficiaries.

In fact, small cap stocks have outperformed large cap stocks over the past five years. The Russell 2000 Index of small cap stocks has generated a compounded five-year return of 152.27%, against 120.5% generated by the large cap index, S&P 500 (read:

).

Small cap companies usually focus more on the domestic segment as compared to larger companies which have a more international exposure. Small caps are thus expected to deliver superior returns than their larger counterparts.

Growth stocks usually enjoy a competitive edge against their competitors. This is due to the fact that growth companies primarily reinvest a major portion of their retained earnings in capital projects and pay out smaller dividends.

However, it is worth noting that growth stocks have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility especially compared to value stocks.

Thus, given the strengths and weakness of small cap growth stocks, a look at a top ranked small cap ETF will be a good idea to capture a surge, especially based on our Zacks ETF Ranking system.

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read:

).

The aim of our models is to select the best ETF within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the small cap space, we have taken a closer look at the top ranked VTWG. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy' (see the full list of

) and is detailed below.

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The fund seeks to track the performance of the Russell 2000 Growth Index before fees and expenses, having amassed $130.9 million since inception. The index primarily holds growth stocks of small U.S. companies (see

).

Due to this focus, the fund holds a huge basket of 1180 stocks which are quite well diversified. None of the individual holdings form more than 0.61% of total assets. CoStar Group Inc., Athenahealth Inc. and Acuity Brands are the top three holdings of the fund.

Sector-wise, the fund allocates more than one-fifth of its assets towards Healthcare, followed by Technology (18.8%) and Consumer Discretionary (16.5%). Energy, Consumer Staples and Utilities have the least allocation in the fund.

The fund seems to be a little light on volumes, having a daily average volume of just 20,000 shares. However, the fund is a low-cost option having an annual expense of just 20 basis points.

Though it has been choppy in the past week, this fund is still up roughly 30% in the past year, and thanks to its top ranked status, it could be a solid choice for investors seeking more small cap exposure at this time.

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