Investors who want to diversify away from large companies can utilize to exchange traded funds to track the smaller segment of the U.S. equities markets.
For instance, the PowerShares FTSE RAFI 1500 Small-Mid Portfolio (NYSEArca: PRFZ) provides significant exposure to small U.S. stocks, along with some mid-cap exposure, and also shows a value tilt due to its indexing methodology. PRFZ has increased 2.4% year-to-date and touched a new intra-day high Thursday before pulling back with the broader equities market. [Small-Cap ETFs: Look Beyond the Russell 2000]
PRFZ mostly tracks small- and micro-cap stocks and tracks an alternatively weighted index based off Research Affiliates research, which tilts holdings based on fundamental measures of book value, cash flow, sales and dividends. Specifically, the fund holds 45.8% small-caps, 37.5% micro-caps and 15.5% mid-caps. The ETF serves as the small- and mid-cap version of the popular large-cap-oriented PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF).
The underlying indexing methodology provides an alternative to potential issues that could manifest in traditional market-cap weighted indices, such as overweighting expensive stocks an underweighting cheaper companies.
“Fundamental indexing increases exposure to stocks that have become cheaper and pares back on holdings that have become more expensive when the fund rebalances,” according to Morningstar analyst Alex Bryan.