Small Cap Performance is Worth Watching After a Recession

While investors may flock to the relative safety of large cap equities during a recession to lessen the blow of market volatility and to provide a cushion during a market downturn, small cap performance is worth watching as the economy exits a recession. As such, investors may want to give small cap equity funds a look now and make a value-oriented play relative to their potential gains.

Here’s what a couple of market strategists had to say regarding the strength of small caps:

“It’s been three steps up, one step back for US small caps this year, but looking a historical experience small caps have traditionally outperformed, coming out of recession and economic downtowns,” said Steven DeSanctis, US small & mid cap equity strategist at Jefferies. “Three key positive indicators to watch for this asset class include narrowing high yield spreads, change in investor sentiment toward US small caps and broad economic indicators of a second-half rebound.”’

“Since their return to CME Group in 2017, we have seen growing use of Russell 2000 futures by investors looking to manage downside risk and pursue upside opportunity in US small caps,” said Tim McCourt, MD, Global Head of Equity Index & Alternative Investment Products at CME Group. “In the first quarter, heightened volatility and an increased need to hedge price risk contributed to record volume and broadening interest in futures based on the Russell 2000 at CME Group. It is also important to note that this growing interest came from US as well as international investors.”

Exchange-traded fund (ETF) investors looking for exposure to small caps can check out the Vanguard Small-Cap Index Fund ETF Shares (NYSEArca: VB). VB seeks to track the performance of a benchmark index that measures the investment return of small-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Index, a broadly diversified index of stocks of small U.S. companies.

VB Chart

VB data by YCharts

A Factor-Based Small Cap Option

For investors looking to use factor-based strategies to enhance their small cap exposure, there’s the Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC). The fund seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs ActiveBeta® U.S. Small Cap Equity Index. The index is designed to deliver exposure to equity securities of small capitalization U.S. issuers.

Additionally, the index is constructed using the patented ActiveBeta® Portfolio Construction Methodology, which was developed to provide exposure to the “factors” that are commonly tied to a stock’s outperformance relative to market returns. These factors include value, momentum, quality, and low volatility.

For more market trends, visit ETF Trends.