Small-Cap Core ETFs: A Guide

NEW YORK (TheStreet) -- Small-cap ETFs led the stock market rally Monday and they're leading the stock market higher in 2010. Here's a look at the small-cap core funds available to investors.

In the first half of 2010, going small has paid off. Among the most prominent U.S. market indexes, the small cap focused Russell 2000 has been a clear winner, beating out large cap-centered indexes like the S&P 500 and the Dow. Given this outperformance, ETF investors may wish to follow suit with one of the many small-cap core ETFs available.

With a number of different products from many prominent ETF providers available, picking the strongest small-cap core ETF can prove particularly challenging.

One area to start with is liquidity because many small-cap ETFs suffer from low investor interest. For instance, the SPDR Dow Jones Small Cap ETF (DSC), the iShares Morningstar Small Core Index Fund (JKJ) and the PowerShares Zacks SmallCap Portfolio (PZJ) all trade hands less than 30,000 times per day.

Meanwhile, the iShares Russell 2000 Index Fund (IWM) , the iShares S&P 600 Index Fund (IJR) and the Vanguard Small Cap ETF (VB) have average volumes of 63 million, 1.5 million, and 590 thousand shares respectively. By narrowing the field to these three ETFs, it makes decision making a bit easier.

Between these three funds, different strengths make them appealing to particular types of ETF investors.

IWM is the ideal instrument for large traders looking to move in and out of the market quickly because it has the heaviest volume among the three. IWM's also has a well-diversified index that consists of 2000 positions, so no single position can drive the fund's overall performance. Together, the fund's top 10 positions account for 2.8% of the fund's total portfolio.

IWM's top three holdings include Human Genome Sciences (HGSI), UAL (UAUA), and Tupperware (TUP).

Investors looking for a stronger buy and hold play on small cap companies should consider IJR. IJR has both strong liquidity and a lower expense ratio than IWM. This fund boasts only 600 holdings, making it so that individual positions represent larger chunks of the fund.

However, once again, no single position is enough to overpower the fund. Together, IJR's top10 positions account for 5.3% of assets, with top holdings Skyworks Solutions (SWKS), East West Bancorp (EWBC) and St. Mary Land & Exploration (SM) each accounting for approximately 0.6% of the fund.

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