As markets push ahead, many investors are focused on the S&P 500 and the Dow Jones Industrial Average breaking toward new highs. However, investors shouldn’t forget about small-cap stocks and related exchange traded funds.
“Everyone knows that they need small-cap, but it is a constrained asset class,” Steve Deroian, Head of ETF Strategy for John Hancock, said at the Inside ETFs 2018 conference. “We believe right now is a good time to re-evaluate it. With the run up in the large-cap space, we felt that people are a little under indexed to small cap.”
In an attempt to help investors better access the small-cap segment, John Hancock has partnered up with Dimensional Advisors in offering the John Hancock Multifactor Small Cap ETF (NYSEArca: JHSC). The smart-beta, small-cap ETF may be a great way for investors to gain exposure to the small capitalization segment through a rules-based indexing methodology that could potentially enhance returns and diminish downside risks.
In crafting JHSC’s underlying index, Dimensional “looked to eliminate the lowest profitable and most expensive stocks in the small-cap space, because history will show holding those stocks will actually decrease the value of the small-cap premium,” Deroian said, referring to the long-term premium or outperformance found in small-cap stocks over their larger peers.
The smart-beta ETF follow a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying index may overweight stocks with lower relative prices and underweight names with higher relative prices. The index can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.
The resulting portfolio is one that may help investors achieve better returns over the long haul.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.