Small-Cap ETFs: Analyst Coverage and Portfolio Weights Rise

Broadly speaking, small-cap stocks and the related exchange traded funds have been solid performers this year, though the group’s out-performance of large-cap stocks in not new. Data suggest more high-level investors are embracing smaller stocks.

“Small-cap stocks have outperformed large-caps over the past decade, and Wall Street and its institutional clients are paying more attention to the asset class than they used to,” reports Nicholas Jasinski for Barron’s. “According to research by Eduardo Lecubarri, global head of small- and mid-cap equity strategy at JPMorgan, small-caps have seen both their analyst coverage and portfolio weights rise in recent years.”

While there are hundreds of ETFs offering small-cap exposure, a far smaller number are appropriate for conservative, income-seeking investors. The ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) fits the bill for investors demanding dividends and small-cap exposure.

SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.

SMDV ETF Advantages

SMDV offers investors a higher dividend yield than is found on basic small-cap benchmarks, such as the Russell 2000 Index. Additionally, dividend growth is a quality trait, which can help investors reduce some of the volatility associated with owning small companies. Data confirm that institutional investors are diving into small caps.

“The small-cap Russell 2000 index has climbed 255% since 2009, 11 percentage points ahead of the S&P 500. Meanwhile, the percentage of assets under management invested in small- and midcap stocks in U.S. large- and all-cap funds has doubled since 2007. The shares now represent almost 20% of those institutional investors’ assets,” according to Barron’s.

SMDV holds 61 stocks and allocates 26% of its weight to the utilities sector, one of this year’s best-performing groups. Industrial and financial services stocks combine for 34% of the fund’s weight.

More analysts are covering small-cap stocks, a theme that could bode well for investors going forward.

“And while mid-, large-, and megacaps have all seen a decrease in the average number of brokers’ research departments that cover them since 2016, small-cap coverage in the U.S. actually went up in that time period. But the average small-cap still has only 4.4 analysts who research it, compared with 23.2 for megacaps,” notes Barron’s.

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