Large cap equities have felt the brunt of the blow amid the coronavirus outbreak, but small cap companies are hurting as well with political pundits clamoring for aid for small businesses to stem the economic tide of the pandemic. That said, however, investors shouldn’t overlook the value that small cap exposure can bring even in these uncertain times.
“But crazy and scary as the market may look, now is the perfect time for individual investors to step in,” a Forbes article noted on small cap tech companies. “How can individual investors rebalance their portfolios to outperform the market during recessions? The antidote right now is to shift focus from large tech companies to undervalued smaller-cap tech-focused companies.”
Looking back at historical data, it’s been the large cap companies that have absorbed the majority of the blow during a crisis, but when it comes to searching for value-infused plays in the market, small caps offer investors an option worth considering.
“Historically, when the market drops drastically, large corporations generally drop sharply as well, because statistically large companies tend to have higher explained variance on the trends of the market indexes they are listed on,” the Forbes report added. “On the contrary, because many less-renowned small-cap tech companies generally spend more time leveraging their limited resources developing cutting-edge technologies, they are usually one of the most undervalued groups and can turn out to be valuable investment opportunities in market downturns.”
A Small Cap Multi-Factor Approach
In today’s market that’s brimming with uncertainty surrounding the coronavirus outbreak, it can also help investors to use factor investing to filter out the best opportunities. Nowadays, the focus has been quality and value amid the discounted equities, but investors also shouldn’t miss out on other factors like growth or momentum.
Investors looking for small cap exposure using a multi-factor strategy can use the Principal U.S. Small-Cap Multi-Factor Index ETF (PSC). PSC seeks investment results that closely correspond, to the performance of the Nasdaq US Small Cap Select Leaders Index.
The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index. The index uses a quantitative model designed to identify equity securities (including growth and value stock) of small-capitalization companies in the Nasdaq US Small Cap Index (the “parent index”) that exhibit potential for high degrees of sustainable shareholder yield, pricing power, and strong momentum, while adjusting for liquidity and quality.
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