ETF Picks For 3 Of America’s Best Small Companies

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Through the development of ETFs, investors are not only able to apply them as a great diversification tools, but these funds also grant access to niche markets and businesses often overlooked in large portfolios. Small businesses are typically included in ETFs seeking high growth potential and diversification, even though within the first five years, 50% of all new businesses fail, while others not only flourish but expand. Those looking for some direction into promising small businesses, Forbes’ “Best Small Companies in America” list is a great place to start [see also How To Pick The Right ETF Every Time].

These companies are selected based on a number of requirements, including having an annual revenue between $5 million and $1 billion, they need to have traded for more than a year, and boast a stock price above $5 a share. The highest ranked companies were selected based on earnings growth, sales growth, and return on equity over the last few years. Investors who are looking for great growth potential and aren’t afraid of a little risk should make sure to check out these three companies and the ETFs already invested in them:

SolarWinds, INC (SWI): Affordable IT Software

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With data traffic expected to triple over the next five years, SolarWinds is first on Forbes’ Best Small Companies in America list, as this software company continues to chip away at sales to much larger competitors IBM and HP. By selling software for IT departments that are 80% of functionality but at a tenth of the price, this small firm many not be small for long as sales have grown 38% since 2006 to create a market cap of $233 million [see also High Tech ETFdb Portfolio].

For those looking to cash in on this technology firm, there is currently only one option for ETF investing, the Technology AlphaDEX Fund (FXL). This First Trust ETF has a higher than average expense ratio of 0.70% and SolarWinds only makes up for 2.42% of the portfolio, but with a three-year-return of almost 30% it seems the other companies it holds are also on their way up.

Questcor Pharmaceuticals, Inc (QCOR): Niche BioTech

This biopharmaceutical company has created products in its niche market of serious and hard-to-treat autoimmune and inflammatory disorders, where it leads the industry in research and developing medication for market. Its flagship product, H.P. Acthar Gel, is prescribed to treat infantile spasms (a rare form of epilepsy), multiple sclerosis (where the body damages its own spinal cord), and nephrotic syndrome (where the body damages its own kidneys) [see also ETF Picks For 3 Of The World's Most Innovative Companies].

Currently, there are four exchange-traded products that offer exposure to Questcor, but none offer very high exposure, with the S&P Small-Cap 600 Growth ETF (VIOG) giving the most weighting of them all, 1.28%. The S&P Small-Cap 600 ETF (VIOO) also holds Questcor, but it makes up less than 1% of the fund. Both the Russeell 2000 Growth ETF (VTWG) and Russell 2000 ETF (VTWO) also hold this pharmaceutical firm, but a lot of interest has dried up after healthcare provider Aetna decided to limit its reimbursement of Acthar Gel.

Cirrus Logic, Inc (CRUS): Semiconductor Kings

This small semiconductor group has obtained over 1000 patents on over 700 products since its founding in 1981, and some pretty big clients, namely Apple, who accounted for 62% of sales last year. Their audio processors and converters can be found in smartphones, tablets, MP3s and other portable electronics, and their newest line of remote controlled LED lights are making waves in the industry. With fewer then 500 highly specialized employees, Cirrus has made almost $434 million in revenues and its deals with Apple should only help it grow more [see also Actionable Ideas for ETFs].

There are 10 ETFs with varying levels of exposure to Cirrus, but none with more weighting than the SPDR S&P Semiconductor ETF (XSD). This specialized technology fund allocates 2.78% of its total assets to Cirrus, while the S&P SmallCap Information Technology Portfolio (PSCT) is a close second with its 2.71% weighting. For a more diversified view of the small cap market that still has exposure to our growing semiconductor firm, investors could try the S&P Smallcap 600 Pure Growth (RZG) or SmallCap Earnings Fund (EES). Other ETFs with meaningful allocations to Cirrus include:

  • Small Cap Growth AlphaDEX Fund (FYC)
  • SDPR S&P 600 Small Cap Growth ETF (SLYG)
  • S&P SmallCap 600 Growth Index Fund (IJT)
  • SPDR S&P 600 Small Cap ETF (SLY)
  • Core S&P Small-Cap ETF (IJR)
  • Russell 2000 Growth (IWO)

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Disclosure: No positions at time of writing.

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