Small cap strength was one of the highlights to start the first quarter of 2021, but while the Russell 2000 takes a breather, it might be time to pick up on value options like the Invesco RAFI Strategic US Small Company ETF (IUSS).
IUSS seeks to track the investment results of the Invesco Strategic US Small Company Index. The fund generally will invest at least 80% of its total assets in securities that comprise the index. Strictly in accordance with its guidelines and mandated procedures, Invesco Indexing LLC compiles and maintains the index, which is designed to measure the performance of equity securities issued by higher quality, small-business-sized companies designated as U.S. companies.
The eligible equity securities are assigned a business-size score based on the equally-weighted average of sales, operating cash flow, total return of capital, and book value over the prior five years or life of the security. For real estate securities, operating cash flow is replaced by funds from operations and book value is replaced by total assets.
The securities are then assigned a quality score based on the equally-weighted average of efficiency (ratio of sales-to-assets in the prior year) and growth (percentage change in ratio of sales-to-assets over the prior five years or life of the security). Finally, each eligible security is ranked in descending order by its Business-Size score.
For inclusion in the index, securities ranked in the top 90% by Business-Size score are eligible and, of those 80% with the highest Quality score. Securities in the Index are weighted based on their float-adjusted Business-Size scores. The IUSS expense ratio comes in at 0.23%.
A Slight Small Cap Setback?
The Russell 2000 has taken a breather from highs during the month of April, causing some analysts to wonder whether the run is over for small caps. Nonetheless, small caps still have a slight lead over the large cap S&P 500 index.
“It hangs like the sword of Damocles over the small caps right now,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management on CNBC’s “Trading Nation.” “Producer prices both from the production squeeze and just from the input costs could really have a material impact because I don’t think small caps have the pricing power right now in the marketplace to really pass that on to the consumer, and if they don’t, their margins are likely going to be squeezed.”
However, now could be the time for ETF investors to pounce on small caps.
“The Russell 2000 is pausing in an uptrend, so we do ultimately expect a new high above 2,360. In terms of support levels, it’s currently oscillating around its 50-day average at 2,235, followed by its 100-day average at 2,105,” said Ari Wald, head of technical analysis at Oppenheimer.
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