As people go bargain hunting after the recent selling pressure, investors should consider exchange traded funds that track small capitalization-weighted stocks, which have typically outperformed at the start of a new year.
According to financial data provider Kensho, small-cap stocks have returned more than large-cap companies in the first quarter for the past two decades, reports Deirdre Bosa for CNBC.
Investors who have historically bet on blue-chip Dow Jones Industrial Average stocks in the first quarter for the past two decades were only positive 50% of the time and generated an average 0.92% return. In contrast, the Russell 2000 small-cap index has provided more reliable returns, trading positive 65% of the time and returning 1.6% on average.
Consequently, ETF investors who want to track the small-cap group can look to options like the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P SmallCap 600. The Vanguard Small Cap ETF (NYSEArca: VB) follows the CRSP US Small Cap Index. The iShares Russell 2000 ETF (NYSEArca: IWM) tracks the Russell 2000 Index. Additionally, the Schwab U.S. Small-Cap ETF (NYSEArca: SCHA) tracks the Dow Jones U.S. Small-Cap Total Stock Market Index.
If the current market volatility has you on edge, investors can also turn to small-cap ETFs that specifically target securities that exhibit smaller swings. For instance, more risk-averse investors may look for exposure to small-caps through the he PowerShares S&P SmallCap Low Volatility Portfolio (NYSEArca: XSLV), the small-cap equivalent to the wildly popular PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV). Alternatively, investors can also consider the SPDR Russell 2000 Low Volatility ETF (NYSEArca: SMLV) and Compass EMP US Small Cap 500 Volatility Weighted Index ETF (NasdaqGM: CSA), which also target small-cap stocks that show low volatility.
“Low-volatility investing carries some distinct risks, but this strategy should offer a lower risk profile than traditional market-cap-weighted alternatives,” according to Morningstar analyst Alex Bryan. “Low-volatility stocks have historically accomplished this feat, and there is reason to believe they will continue to do so over a full market cycle”
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.