Small-caps stocks and the corresponding ETFs lagged their large-cap counterparts in the U.S. this year. Investors looking to position for a rebound in smaller stocks in 2018 may want to consider smart beta strategies, such as the Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ).
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.
RWJ is showing signs of being ready to deliver for investors in 2018 with a fourth-quarter gain of about 7%. 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.
The $501 million RWJ holds 604 stocks. Data suggest there is a strong case for employing revenue-weighted strategies, particularly with long-term investments.
“Historical evidence suggests that a revenue-weighted portfolio can maintain stable country and sector exposures during market price swings, since strategies are grounded by a company fundamental, rather than by stock prices, and are rebalanced quarterly,” according to Oppenheimer.
RWJ is positioned cyclically at the sector level as consumer discretionary and industrial names combine for over 51% of the ETF’s weight. The financial services and technology sectors combine for almost 21% of the fund’s roster.
RWJ’s holdings have a weighted average market value of $1.53 billion. The ETF has a standard deviation of 17.2%.
Another way to interpret the current market conditions among small-cap stocks is by the length and breadth of their performance. Small-cap bull markets have lasted a median 698 trading days with a total median total index return of 106.8%. For the current bull market that started February 11, 2016, it has been 446 days with a total return of 57.6% as of November 15, 2017.
For more on smart beta ETFs, visit our Smart Beta Channel.