Most successful large-cap companies began life as small-cap companies. The right small-cap share has the potential to become a very large-cap share with commensurate returns.

We take a look at 4 small-cap ETFs designed to give exposure to this market segment.

Australian-focused ETFs 

The Vanguard MSCI Australian Small Companies Index ETF (ASX: VSO) provides broadly diversified exposure to small companies listed on the ASX. The ETF tracks the MSCI Australian Shares Small Cap Index, before fees, expenses and tax. The fund returned 18.27% in the year to 30 November. Management fees are 0.30% per annum and distributions are made twice yearly.

The ETF held 164 securities at 31 October. Top holdings include Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST), Atlas Arteria Group (ASX: ALX), Charter Hall Group (ASX: CHC), Afterpay Ltd (ASX: APT), Downer EDI Limited (ASX: DOW), Qube Holdings Ltd (ASX: QUB), JB Hi Fi Limited (ASX: JBH), Iluka Resources Limited (ASX: ILU), and ALS Ltd (ASX: ALQ).

The Betashares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20) provides exposure to approximately 180 stocks listed on the ASX ranked in market capitalisation from 21 to 200. This effectively excludes stocks to which many investors are already exposed. The fund returned 18.74% in the year to 31 October.

Management fees are 0.20% per annum and costs are capped at 0.05% per annum. Distributions are made twice yearly. Top holdings include Unibail-Rodamco-Westfield (ASX: URW) (3.2%), Aristocrat Leisure Limited (ASX: ALL) (3.0%), Coles Group Ltd (ASX: COL) (2.5%), Sydney Airport Holdings Pty Ltd (ASX: SYD) (2.4%), Santos Ltd (ASX: STO) (2.2%), Fortescue Metals Group Limited (ASX: FMG) (2.1%), Origin Energy Ltd (ASX: ORG) (2.0%), Sonic Healthcare Limited (ASX: SHL) (2.0%), AGL Energy Limited (ASX: AGL) (1.9%) and Insurance Australia Group (ASX: IAG) (1.8%).

United States-focused ETFs

The iShares S&P Small-Cap ETF (ASX: IJR) provides exposure to more than 600 small US companies. The ETF tracks the S&P Small Cap 600 Index before fees and expenses. Returns for the year to 30 November were 12.79%. Management fees are 0.07% and distributions are made quarterly.

Top holdings include cash (1.51%), Arrowhead Pharmaceuticals (0.83%), Medicines (0.82%), Darling Ingredients (0.52%), LHC Group (0.51%), Topbuild Corp (0.49%), Glacier Bancorp (0.49%), Cabot Microelectronics (0.49%), Neogen Corp (0.47%), and Lithia Motors (0.46%).

The iShares S&P Mid-Cap ETF (ASX: IJH) provides exposure to mid-size US companies. The ETF tracks the S&P Mid-Cap 400 before fees and expenses. Returns were 11.82% in the year to 31 October. Management fees are 0.07% and distributions are made quarterly.

Tops holdings at the end of October included Zebra Technologies (0.74%), Teledyne Technologies (0.69%), Steris (0.69%), Old Dominion Freight Line (0.67%), Alleghany Corp (0.64%), Dominos Pizza (0.64%), Camden Property Trust REIT (0.63%), West Pharmaceutical Services (0.61%), Teradyne (0.60%) and Tyler Technologies (0.59%).

Foolish takeaway

Small-cap shares can be under-recognised, and thus undervalued, by the market. The potential for exponential returns can be an attraction, but come with a degree of risk. Diversification is an important part of managing this risk.

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