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Small-Cap Core ETFs: A Guide

Here are three small-cap core ETFs with strengths that appeal to different investors.
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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


, the

iShares Morningstar Small Core Index Fund

(JKJ) - Get iShares Morningstar Small-Cap ETF Report

and the

PowerShares Zacks SmallCap Portfolio


all trade hands less than 30,000 times per day.

Meanwhile, the

iShares Russell 2000 Index Fund

(IWM) - Get iShares Russell 2000 ETF Report

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, the

iShares S&P 600 Index Fund

(IJR) - Get iShares Core S&P Small Cap ETF Report

and the

Vanguard Small Cap ETF

(VB) - Get Vanguard Small-Cap ETF Report

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





, and


(TUP) - Get Tupperware Brands Corporation Report


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) - Get Skyworks Solutions, Inc. Report


East West Bancorp

(EWBC) - Get East West Bancorp, Inc. Report


St. Mary Land & Exploration

(SM) - Get SM Energy Company Report

each accounting for approximately 0.6% of the fund.

Bargain hunters should consider VB. Although it has considerably less assets than the previous two options, with an expense ratio of 0.14%, this fund is the cheapest of all small cap ETF offerings. Comparatively, IWM charges investors 0.24% and IJR charges 0.20%.

VB's index consists of 1700 separate holdings. As of the end of March, the 10 largest constituents accounted for 2.5% of the fund. Top positions include

Whiting Petroleum

(WLL) - Get Whiting Petroleum Corporation Report






(ASH) - Get Ashland Global Holdings, Inc. Report

. Each of these positions accounts for 0.3% of the fund.

In 2010, each of these funds has seen nearly identical performance. Therefore, choosing which is best ultimately it depends on what type of investor you consider yourself.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management was not long any of the equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.