When I did a lot of cross stitch, I liked 5-6" hoops the best, but I can't remember why.... :D I think it was because the bigger hoops don't grip as well as the small ones.
There are a couple of books about small alphabets in cross stitch, if you're going to do mostly labels - they're called backstitch alphabets.
Or you could buy an embroidery sewing machine and make your own labels with that. :mrgreen: (And whole quilt blocks, while you're at it.)