Small-cap stocks and the related exchange traded funds topped their large-cap counterparts in 2022, stoking speculation that more of the same could be in the offing in 2023.
Should that prognostication prove accurate, ETFs such as the SPDR S&P SmallCap 600 ESG ETF (ESIX), among others, could benefit. ESIX, which follows the S&P SmallCap 600® ESG Index, enters 2023 with tailwinds, including the aforementioned 2022 out-performance of large-cap equivalents, as well as some important quality traits.
Additionally, there are signs more advisors and investors are turning to environmental, social, and governance (ESG) funds, including ETFs, as core holdings. For market participants that are seeking small-cap exposure, ESIX makes sense as a core holding due its relatively broad lineup — 378 holdings — and favorable annual fee of just 0.12%, or $12 on a $10,000 stake. ESIX’s value ties are also notable.
“One notable detail from last year’s stock market is that if you break down the lack of returns, there wasn’t much of a differentiator between large, medium, and small-cap stocks, said Dave Sekera, Morningstar’s chief US market strategist,” reported Business Insider. “Instead, investors spent the year shifting from growth to value stocks in an attempt to seek a safe haven. This adjustment has reshuffled the valuations of stocks in various sectors.”
Although ESG is often associated with growth investing, ESIX is one of the ETFs in this category that credibly offers investors ample value exposure as over 47% of its total weight is allocated to financial services, industrial, and healthcare stocks.
That’s potentially meaningful as 2023 unfolds, not only because of the aforementioned bullish sentiment ascribed to smaller equities, but also because some market observers believe value’s current two-year winning streak against growth will continue this year. ESIX could further by supported by fewer interest rate hikes this year by the Federal Reserve.
“If investors are willing to withstand the coming volatility and are in it for the long haul, Sekera says there are great opportunities in stocks that are undervalued. He specified small-cap stocks, which are trading at the greatest discount relative to their larger counterparts,” according to Business Insider. “One thing to note is that it may take a while before stocks recover. A December 31 note from Morningstar forecasts two more rate hikes coming down the pipeline, both anticipated in the first half of the year. The Federal Reserve is then expected to ease its monetary policy, which would lead to a rebound in the stock market.”
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