It’s not just fundamentals. Technical signs are pointing to more strength for smaller stocks, paving the way to a strong finish to 2020 for exchange traded funds such as 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.

The ERShares ETF selects the most entrepreneurial, primarily Non-US Small Cap companies, that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF). ERShares’ ETF delivers strong performance across a variety of investment strategies without disrupting investors’ underlying risk profile metrics. Their geographic diversity enables them to harness global advantages through additional returns associated with currency fluctuations, strategic geographic allocations, comparative trade imbalances, and relative supply/demand strengths.

“Small cap stocks have shown strong signs of life in recent months after lagging large caps for the first part of 2020 and for much of the last several years,” according to Nasdaq Global Indexes.

ERSX in the Short- and Long-Terms

If history repeats ERSX could prove to be a compelling long-term idea, too.

ERSX YTD Performance

“If this trend of outperformance of small cap stocks continues it would mark a significant change from what has largely been in place for years—the trend of outperformance by large cap stocks,” according to Nasdaq.

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 they 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.

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.