Small-cap stocks and and related small-cap ETFs are delivering significant out-performance relative to large-cap rivals this year. The iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P Small-Cap 600 Index and is the second largest small-cap related ETF, is higher by more than 12% year-to-date.
While small-caps have outperformed and continued to attract investment interest, some analysts warned that the strong corporate earnings and economic data could conceal tariff’s potential negative impact on small businesses.
IJR “tracks the less popular S&P SmallCap 600 Index and uses buffering rules to mitigate turnover when it doesn’t materially affect the portfolio’s composition. This is a well-diversified small-cap index that accurately represents its peers’ opportunity set,” said Morningstar in a recent note.
The Index Matters
Advisors and investors should always consider an ETF’s underlying index because there are important differences among benchmarks tracking similar asset classes. The S&P SmallCap 600 Index, IJR’s underlying index, does things differently compared to some rival small-cap gauges.
“A committee selects the final holdings of the S&P SmallCap 600 Index, so it doesn’t follow mechanical rules or a strict reconstitution schedule like many of its index peers,” said Morningstar. “This structure favors flexibility over transparency. The index also avoids recent IPOs and considers only profitable stocks for inclusion, which gives the fund a stronger quality orientation than the broader Russell 2000 Index.”
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The $45.18 billion IJR holds 601 stocks and charges 0.07% per year, making it one of the most cost-effective domestic small-cap ETFs on the market. None of IJR’s holdings exceed weights of 0.56%.
Industrials are IJR’s largest sector weight at 19.76% while financial services and technology names combine for 32% of the fund’s roster.
“During the past decade through June 2018, the fund beat the category average by 3.3 percentage points annually with similar risk,” said Morningstar. “Much of this relative outperformance can be attributed to the fund’s cost advantage. Because this index fund is always fully invested, it suffered a larger drawdown than the category average during the financial crisis. But its smaller cash drag pays off during bull markets.”
Morningstar has a Gold rating on IJR.
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