Mid- and small-cap stocks are usually riskier investment propositions than their large-cap brethren. They tend to have less-established competitive advantages and are more sensitive to the economic cycle. But they offer diversification benefits and may compensate investors with higher returns. Vanguard Extended Market ETF (VXF) is an excellent choice for exposure to U.S. stocks that land outside of the S&P 500. This fund achieves a leg up over its peers by efficiently tracking a broadly diversified index at a low fee. It earns a Morningstar Analyst Rating of Gold.
The fund tracks the S&P Completion Index, a market-cap-weighted index which targets stocks that land outside of the S&P 500. Market-cap weighting skews the fund toward the largest names outside of the S&P 500, but it reaches further down the market-cap spectrum than most mid-blend Morningstar Category peers and straddles the mid- and small-cap size segment breakpoint. Indeed, its average market capitalization is about half that of the category average. The fund’s broad reach and market-cap weighting should help it effectively diversify firm-specific risk.
Adam McCullough, CFA has a position in the following securities mentioned above: VTI. Find out about Morningstar's editorial policies.