Expectations are in place for small-cap stocks to rally anew next year, and some of that enthusiasm centers around small-cap value — an often potent factor combination.
Among ETFs offering that combination, the Invesco S&P SmallCap 600 Pure Value ETF (RZV) is one meriting consideration because of its pure value emphasis, which includes the right sector mix with which to capitalize on small-cap value strength.
“Cyclical Energy and Financials sectors have outstripped the market and further outpaced defensive Healthcare, Consumer Staples and Utilities sectors to date in 2021,” according to IHS Markit. “During the recent expansion in corporations’ stock buyback programs since early 2020, the steadier pace of share repurchases by cyclical value sectors has provided a tailwind heading into 2021.”
Translation: There are significant differences between the value sectors that are defensive and those that are cyclical. The $300.2 million RZV features exposure to both, but the Invesco ETF has a cyclical value feel to it. For example, consumer discretionary stocks account for nearly 23% of RZV’s weight. That’s the fund’s largest sector allocation.
As for the aforementioned financial services and energy sectors, those groups combine for over a quarter of RZV’s weight, and that’s proving meaningful to the fund’s 2021 success. Year-to-date, RZV is up 46.1%, while the largest small-cap value ETF is higher by 27.8%.
“Looking at performance for 2021 through, we find that Energy stocks far outpaced the remaining value sectors, with a cumulative return of 49%. This compares with the SPDR S&P 500 ETF return of 23%. Financials were also highly favored, exceeding both the remaining sectors and the benchmark with a 30% cumulative return,” adds IHS Markit.
RZV’s 19.66% allocation to the financial services sector, its second-largest sector exposure, could be meaningful to investors next year, assuming that the Federal Reserve proceeds with multiple interest rate hikes. Small-cap financials are even more rate-sensitive than their large-cap counterparts.
“In summary, on closer inspection of value stocks in anticipation of an increasing rate environment, we find differences in investors’ preferences for cyclical versus defensive value stocks. Since 2020, in a prolonged period of extremely easy financial conditions, stock buyback programs have proliferated, with a steadier pace of share repurchases associated with cyclical value sectors,” concludes the research firm.
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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.