Exchange traded fund investors who are still interested in U.S. equities exposure should focus on the smaller segment of Corporate America.
“For equity exposure, stay here in the U.S.,” with an emphasis toward smaller stocks, Jim McCaughan, chief executive of Principal Global Investors, said on CNBC.
For instance, the iShares Core S&P Mid-Cap ETF (NYSEArca: IJH) and SPDR S&P MidCap 400 ETF (NYSEArca: MDY) both track the S&P MidCap 400 Index, which include a 68.7% tilt toward mid-caps and 31.2% to small-caps.
The Vanguard Mid-Cap ETF (NYSEArca: VO) provides an alternative as it follows the CRSP US Mid Cap Index, which leans towards larger companies with a 79.9% tilt toward mid-caps and 19.2% in large-caps.
Additionally, the Schwab US Mid-Cap ETF (NYSEArca: SCHM), which follows the Dow Jones U.S. Mid-Cap Total Stock Market Index, includes a 86.0% position in mid-caps and 11.1% in small-caps.
McCaughan argues that that these smaller companies are less susceptible to currency risks, notably a stronger U.S. dollar, and are better positioned to benefit from strengthening domestic conditions, such as the improving housing market and cheaper energy.
With the U.S. economy “basically still quite strong,” McCaughan projects a 2% to 3% growth for the rest of the year. The U.S. economy is looking better than previously anticipated after revised gross domestic product numbers showed the economy only contracted an an annual 0.2% rate, compared to previous estimates of a 0.7% decline.
However, the money manager warned that there will be a pullback in response to a Federal Reserve interest rate hike, but it will only be short lived and potentially provide another buying opportunity.
Investors who would like to take on the smaller segment of the U.S. equities market can look at small-cap ETFs, including the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), Vanguard Small Cap ETF (NYSEArca: VB) and iShares Russell 2000 ETF (NYSEArca: IWM). [Despite Broad Market Slowdown, Small-Cap ETFs Are Outperforming]
IJR includes a 65.6% position in small-caps and 33.1% in micro-caps. VB holds 43.0% mid-caps, along with 47.4% small-caps and 9.3% micro-caps. IWM tracks 11.0% mid-caps, 58.3% small-caps and 30.7% micro-caps.
For more information on middle capitalization stocks, visit our mid-cap category.
Max Chen contributed to this article.