Small caps and the energy sector have been on a dynamite rally the past few months. Mixing both sectors can garner even more explosive gains via the Invesco S&P SmallCap Energy ETF (PSCE).

PSCE seeks to track the investment results of the S&P SmallCap 600® Capped Energy Index. The fund generally will invest at least 90% of its total assets in the securities of small-capitalization U.S. energy companies that comprise the underlying index.

These companies are principally engaged in the business of producing, distributing, or servicing energy related products, including oil and gas exploration and production, refining, oil services, and pipelines. The fund’s expense ratio comes in at 0.29%, which is a relative bargain given its category average of 0.47%.

As mentioned, the ETF is benefiting from rallies in small caps and the energy sector, which have yielded an impressive 82% in the past few months. PSCE is up almost 30% over the past month alone.

PSCE Chart

Renewable Energy Driving PSCE’s Performance

PSCE’s focus on small cap companies allows for innovative holdings that focus on renewable energy, like its top holding, Renewable Energy Group, Inc.

Renewable energy is a subsector that is also seeing strong growth, which helps to explain PSCE’s strong performance. Just to underscore the strength of the clean energy rally, a look at the WilderHill Clean Energy Index and the Nasdaq Clean Edge Green Energy Index both show gains of over 200%.

^ECO Chart

The three companies with the largest allocations include the aforementioned Renewable Energy Group Inc., oil and gas drilling company Helmerich and Payne, and Southwestern Energy Company. All three of these stocks have had a stellar last few months on the back of an energy rally.

HP Chart

U.S. President Joe Biden’s focus on clean energy and a sustained rise in oil prices could provide tailwinds for PSCE. For the short-term trader looking at an opportunity in the energy rally, now may be the best time to strike, according to Mark Tepper, president and CEO of Strategic Wealth Partners.

“This is a very tricky sector,” said Tepper during an episode of CNBC’s “Trading Nation.” “In my opinion, I think this is no longer a buy-and-hold sector. It’s more of a trade.”

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