The size factor is used to highlight the potency of smaller stocks over large-cap equivalents. There are options for putting size potency to work in portfolios beyond traditional small-cap exchange trade funds.
The AGFiQ U.S. Market Neutral Size Fund (NYSEArca: SIZ) is an excellent avenue for investors looking to harness strength in smaller stocks while exploiting large-cap laggards.
SIZ “provides consistent exposure to the size factor by investing in the underlying index which reconstitutes and rebalances monthly in equal dollar amounts in equally weighted long smaller market capitalization positions and equally weighted short larger market capitalization positions within each sector,” according to the issuer.
Markets exhibit cyclicality with one group outperforming another in most market environments due to their distinct macroeconomic relationships. Many investors try to capitalize on the divergence by overweighting favored groups relative to others. However, most investors are long only constrained and unable to take full advantage of their view.
The Strategy for Sizable Returns
One of the primary selling points about a strategy such as SIZ is that as a long/short product, it can generate positive returns regardless of broader market direction.
“Removing the long only constraint in a portfolio means that the securities ranked poorly by the model can be more than simply underweighted relative to the benchmark or absent from the portfolio, rather investors can actually short these names and benefit from their price depreciation,” according to AGF research. “This results in the security exhibiting an effectively negative weight in the portfolio.”
There are other benefits to long/short strategies such as SIZ that investors may not be aware of.
“In a long-short factor investment strategy, instead of the market being the greatest driver of return, return is generated by capturing the spread between factor exposures on the long and short sides,” notes AGF. “As these sides do not always move in unison, a manager has an ability to create alpha as long as the long positions outperform the short positions. By having this additional tool to create alpha, an investor can better tailor the return stream of the portfolio to their desired outcome.”
For more information on alternative strategies, visit our Alternatives Channel.
