Small-capitalization stocks and related exchange traded funds are beginning to take the lead after the recent pullback. Investors who remain wary of further weakness may consider a smart-beta strategy that focuses on better fundamentals to help drive enhanced returns over the long run.
The benchmark Russell 2000 and the small-cap segment has been taking the lead after the recent selling, with many ETF investors jumping back onto the small-cap theme in recent weeks.
Furthermore, small-cap stocks were strengthening as traders renewed their outlook on the Trump administration’s pro-growth agenda. In recent weeks, U.S. markets have been roiled over uncertainty concerning President Donald Trump’s ability to push through pro-growth economic policies through Congress as the White House wades through political intrigue. However, the small-cap segment is recovering on expectations that the administration could overhaul the U.S. tax policy.
However, given the ongoing uncertainty, many still anticipate lingering volatility in the small-cap recovery, especially as smaller companies are traditionally much more at risk than their more solid and stable large-cap counterparts.
Alternatively, investors can consider smart beta small-cap ETFs to potentially diminish downside risks and still participate on upside potential. For instance, the Legg Mason Small-Cap Quality Value ETF (NasdaqGM: SQLV) tries to reflect the performance of the Royce Small-Cap Equity Value Index, which is comprised of small-cap companies with lower than average valuation, higher than average profitability and higher than average debt coverage.
The PowerShares DWA SmallCap Momentum Portfolio (NasdaqGM: DWAS) follows the popular Dorsey, Wright & Associates proprietary selection methodology that is designed to identify small-cap firms with positive relative strength characteristics in an attempt to follow companies with strong forward momentum.
Additionally, the Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ) follows a revenue weighting methodology, which could provide diversified exposure to the market, is not influenced by stock price, reflects a truer indication of a company’s value and offers stable sector exposure. Moreover, revenue weighting may provide a more value-oriented portfolio and historically outperformed in a value-driven market while showing lower drawdowns during growth-driven markets.
For more information on small-capitalization stocks, visit our small-cap category.