The iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the widely observed Russell 2000 Index of small-cap names, and other small-cap ETFs are coming off solid performances in September, but some market observers believe smaller stocks could encounter some October turbulence.
“The Russell 2000’s history shows that investors shouldn’t expect much from the index in October,” reports Nicholas Jasinski for Barron’s. “The 10th month of the year tends to see the small-cap index lose more than a percentage point on average, and end about half of the time, according to Dow Jones Market Data, using performance since 1987.”
Investors looking to remain engaged with small caps in less volatile fashion should consider the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV), which has a history of being less volatile than standard small-cap funds.
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. The ProShares ETF is one of the highest-rated funds in the small-cap value category.
“Last year saw the Russell 2000 drop almost 11% in October, before recovering slightly in November. Other major market crashes have come in October as well. Stocks—and higher-beta small caps in particular—tumbled in October of 1929, 1987, and 2008,” according to Barron’s.
Due to its dividend growth focus, SMDV is usually less volatile when volatility spikes and its downside capture is significantly lower than that of standard small-cap benchmarks.
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.
Investors may want to consider SMDV now because small-cap stocks often flourish in the latter stages of the fourth quarter.
“After October passes, history says that small-caps tend to be in the clear. November and December have been among the strongest months of the year for small caps. The Russell 2000 was up in four out of five Decembers since 1987, with an average return of 2.6%. November has been in the green 66% of the time, with a 1.5% gain on average,” according to Barron’s.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.