Momentum is on the side of small caps right now, and it’s not stopping in the United States. ETF investors can capture small cap exposure in China with funds like the iShares MSCI China Small-Cap ETF (ECNS).

Due to their sensitivity to the movements of the market, small caps can absorb the best of a rally as a global vaccine deployment provides a backdrop for market tailwinds. Conversely, they can succumb to the selling pressure of a downturn so investors must keep their wits about them.

ECNS seeks to track the investment results of the MSCI China Small Cap Index. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and in investments that have economic characteristics that are substantially identical to the component securities of the underlying index.

The index is a free float-adjusted market capitalization-weighted index designed to measure the performance of the small capitalization segment of Chinese equity securities markets, as represented by the H-shares and B-shares markets. Overall, ECNS gives investors:

  1. Exposure to small public companies in China
  2. Targeted access to small cap Chinese stocks
  3. Use to express a view on a single country market segment; investors can also pair the fund with MCHI for comprehensive China coverage
  4. Strong performance, with the fund up about 54% within the last 12 months

ECNS Chart

Prepare for Potential Turbulence

As mentioned, small caps can be subject to heavy volatility in the market.

In a recent CNBC interview, Bryn Mawr Trust’s Jeff Mills said a rise in consumer savings is helping to fuel small caps.

“There’s $1.5 trillion more in consumer savings today than there was at this time last year,” said Mills. “We think all of that in combination leads to better performance from areas like small caps.”

Yet investors must be ready for the market to go sideways.

“Inflows have been pretty aggressive into small cap ETFs, so I wouldn’t be surprised if we saw a little bit of a pause here,” said Mills, a CNBC contributor. “But that kind of momentum, that kind of 99th percentile momentum, tends to be a really good thing for returns looking out over the next 12 months.”

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