Help Clients Stomach Small-Cap Volatility With ROSC

Volatility is a key concern for investors in small-cap stocks, particularly during periods of market turbulence.

Investors sitting out small-cap exposure, however, are missing out on attractive returns and enhanced diversification. Advisors can therefore help clients maintain target exposure to small-cap stocks by allocating to a strategy that targets lower volatility securities, effectively smoothing out market turbulence.

“Some advisors own just large-cap U.S. equities and avoid small caps for their more risk-averse clients,” Todd Rosenbluth, head of research at VettaFi, said. “But there are some compelling small-cap ETFs that focus on less volatile stocks making exposure much more appropriate.”

The Hartford Multifactor Small Cap ETF (ROSC) may be a solution as the fund aims to outperform cap-weighted indexes over a complete market cycle with up to 15% less volatility. ROSC invests in companies in the U.S. small-cap universe that exhibit strong and balanced exposure to the value, momentum, and quality factors.

See more: “Advisors Plan to Allocate More to Value Stocks, Survey Shows

The outlook for small-cap stocks has recently improved, as the segment of the market has rallied in recent months. Small-cap stocks are impressively outpacing large caps over the past month, highlighting the value in diversifying away from top-heavy indexes.

ROSC is up 6.4% over one month while the large-cap benchmark is up 1.6% during the same period.

The Advantages of a Multifactor ETF

Many investors are not aware of the unintended risks that cap-weighted ETFs can introduce into portfolios.

While investing in the broader market – a collection of companies based on size — seems like it should offer balanced exposure, it can often introduce significant concentration risk.

See more: “Watch Out for Concentration in Emerging Markets

On the other hand, multifactor ETFs seek to target desired return-enhancing factors and reduce exposure to unrewarded risk exposures. This is particularly impactful in the small-cap space, as the segment of the market is inherently more volatile.

For more news, information, and analysis, visit the Multifactor Channel.

Investing involves risk, including the possible loss of principal.

This article was prepared as part of Hartford Funds paid sponsorship with VettaFi. Hartford Funds is not affiliated with VettaFi and was not involved in drafting this article. The opinions and forecasts expressed are solely those of VettaFi. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, a recommendation for any product or as investment advice.