In April of 2010, exchange traded fund provider Invesco PowerShares launched a suite of small cap sector based equity ETFs in light of the enormous investor appetite for large cap sector funds including those from State Street Global Advisors, iShares, First Trust, Vanguard and other issuers.
The funds that are currently available to investors in this space are PSCD (S&P Small Cap Consumer Discretionary), PSCC (S&P Small Cap Consumer Staples), PSCE (Energy), PSCF (Financials), PSCH (Healthcare), PSCI (Industrials), PSCT (Information Technology), PSCM (Materials) and PSCU (Utilities).
With tactical sector rotation a popular strategy among managers of ETF portfolios, the idea that one can manage a portfolio of small cap driven sector ETFs in a similar manner as large caps, has started to catch on in the marketplace with more than a year of live performance history now in these ETFs.
Each PowerShares small cap sector ETF is based on an S&P 600 Small Cap sector index, much like the large cap Select Sector Spyders from SSGA track S&P 500 Large Cap sector indices. The idea behind these small cap offerings is that while they likely pose more risk and higher levels of volatility than their large cap counterparts, since small caps have demonstrated superior returns over time when compared to large caps, the longer term rewards from an investment standpoint will be greater.
For example, the best performing small cap sector ETF year to date, PSCH (PowerShares S&P Small Cap Healthcare) has registered a 4.92% return versus XLV (SPDR Healthcare Select) which is up 3.29%.
The second best small cap performer, PSCU (PowerShares S&P Small Cap Utilities) is up 1.60% year to date, but is trailing large cap utilities, as XLU (SPDR Utilities Select) has gained 8.00% year to date.
The fact that these small cap tools now exist in ETF form, will allow portfolio managers that have established track records in running tactical sector portfolios to apply their sector rotation logic to the small cap space when they believe that the market is in an environment where small caps may outperform large caps.
We should mention that from a trading standpoint, the PowerShares small cap sector ETFs all trade a fraction currently of the average daily volumes of the large cap sector products from SSGA, but from a liquidity standpoint, all of these ETFs can be feasibly traded in large size provided the proper techniques and access to liquidity via a seasoned trading desk are sought out.
PowerShares S&P Small Cap Healthcare
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