It may be a good time to consider small-capitalization stocks and related exchange traded funds as the growth outlook and an election year could support the asset category.
For instance, investors can look at the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P SmallCap 600.
“We believe small-cap stocks will experience above-average earnings growth in 2016 that in some cases is not fully reflected in valuations,” Todd Rosenbluth, Director of ETF Research at S&P Capital IQ, said in a research note.
The S&P SmallCap 600 Index is currently trading at 18.6 times 2016 estimates, compared to the 18.1 times estimates for mid-caps and 16.5 times estimates for the S&P 500 index. Moreover, the small-cap index shows a price-to-earnings growth rate of 1.3 times, a discount to its larger peers of 1.6 times for mid-caps and 1.5 times for the S&P 500.
Moreover, S&P Capital IQ Equity Strategist Sam Stovall pointed out that small-caps have advanced an average 10.9% in Presidential election years since 1980, or more than double the 4.2% gain for the S&P 500.
S&P Capital IQ also notes that a cheap ETF option, like IJR, may be a good way to capture broad exposure to U.S. small-caps. According to S&P Index Versus Active research, only 13% of all small-cap funds outperformed the S&P SmallCap 600 Index for the five years ended June 2015.
“To us, this highlights the challenges of finding small-cap funds with consistently strong records,” Rosenbluth added. “Given much higher expense ratios for mutual funds, we think small-cap ETFs are compelling alternatives.”