Small-cap stocks aren’t often thought as a primary destination for investors seeking the advantages of environmental, social, and governance (ESG) principles, but as the landscape of ESG exchange traded funds evolves, more products are providing access to smaller stocks.
Consider the SPDR S&P SmallCap 600 ESG ETF (ESIX). ESIX is fresh on the ESG ETF scene, having come to market in January. The newly minted ETF follows the S&P SmallCap 600® ESG Index — the ESG derivative of the widely observed S&P SmallCap 600 Index.
“The S&P SmallCap 600 ESG Index is designed to measure the performance of securities meeting certain sustainability criteria (criteria related to ESG factors), while maintaining similar overall industry group weights as the S&P SmallCap 600 Index,” according to State Street Global Advisors (SSGA).
While many investors often sit on the sidelines when it comes to new ETFs, market participants might want to consider altering that thinking when it comes to ESIX because not only does the rookie fund offer ESG perks, domestic small-caps are attractively valued today following some weakness in the asset class to start 2022.
“Small cap ETFs trade close to longer-term averages across all valuation metrics and screen as the most attractive group with the US Size ETF category,” said Bank of America in a recent research note.
As is the case with many ESG ETFs tracking offshoots of popular benchmarks, ESIX’s roster is smaller than equivalent non-ESG ones, showing that ESG mandates prevent some stocks from joining these portfolios. Still, ESIX is home to 378 of the members of the S&P SmallCap 600 — an expansive lineup for a small-cap ESG ETF.
ESIX is diverse at the holdings level, as none of its components exceed a weight of 0.91%. Range Resources (NYSE:RRC), ESIX’s largest holding, will soon depart the ETF because it’s being promoted to mid-cap indexes. There are other compelling reasons to consider ESIX over the near term.
“Jill Hall notes that small caps trade at a 29% historical P/E discount to large caps as multiples compressed during January’s sell-off. The Russell 2000 forward P/E fell to 14.6x from 16.2x, its lowest since March 2020 and 5% below its long-term average. A strong 1Q earnings season increased full-year earnings expectations,” adds Bank of America.
ESIX allocates over half its weight to financial services, industrial, and tech stocks. The new ETF charges 0.12% per year, or $12 on a $10,000 investment.
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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.