Small-cap stocks, including those with international flair, are picking up momentum, a scenario that brings opportunity with the ERShares International Equity ETF (NYSEARCA: ERSX).

ERSX tracks 50 non-U.S. companies from around the world with market capitalizations between $300 million and $5 billion USD and the highest rank based on the six investment style factors.

ERSX YTD Performance

On a technical basis, there are compelling factors backstopping the ERSX thesis over the near-term.

“Small caps are looking strong, and seem likely to outperform large caps over the next year. Small caps have seen two decidedly positive trends over the last month—an outperformance relative to the S&P 500, and increasing breadth,” according to Nasdaq.

More on the ERSX ETF

Mega-cap stocks have dominated in this year’s rally, but exchange traded fund investors should not forget the role of small-capitalization stocks, especially in the nascent recovery phase of the traditional economic cycle.

Small-cap companies could be well-positioned to benefit from a COVID-19 economic recovery. During downturns, small stocks typically underperformed, partially because small stocks often have fewer buffers to survive economic shocks. However, smaller companies have rewarded investors for their higher risk over full market cycles. Furthermore, the size factor may be a particularly useful investment in the current economic climate since it has typically outperformed during the recovery period of an economic cycle relative to other factors.

ERShares deploys a unique factor-driven to underpin ERSX.

“We incorporate a proprietary investment model which applies a global, bottom-up, and top-down filtering process. Our ‘entrepreneur’ factors utilize both qualitative and quantitative criteria,” according to ERShares. “We apply our criteria to identify publicly traded entrepreneurial companies. History has shown that our model is effective across different market caps and geographical locations. We focus on management and leadership.”

Lastly, ERSX bears watching as regime change will likely lead to more deficit spending.

“On the fundamental front, small caps are starting to follow a well-trodden path to success. Historically, every period since 1990 in which the Russell 2000 has outperformed the S&P 500, spreads have been widening. Bond watchers will have noticed that Treasuries have risen 28-40 bp recently across different maturities. Since that rise in yields seems likely to continue because of the growing debt needs of the US government, small caps may be in for a good run,” according to Nasdaq.

For more on entrepreneurial strategies, visit our Entrepreneur ETF Channel.

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.