Small-cap stocks are in a groove and the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC) is certainly one of them. But in the case of PSC, there’s more to the investment story.
PSC’s underlying benchmark, the Nasdaq US Small Cap Select Leaders 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,” according to Principal.
PSC’s value exposure is one of the reasons the Principal fund is increasingly relevant; history shows small-cap value stocks often perform well following presidential elections.
“Growth outperforms value for years. Large-cap stocks, especially technology, have trounced small caps. Then comes a U.S. presidential election and the trends reverse as value and small caps rally suddenly and powerfully. A market ‘rotation is proclaimed,” writes Morningstar analyst Dan Lefkovitz.
“This certainly sounds like a description of 2020. But this same scenario played out in 2016. After Donald Trump’s victory over Hillary Clinton, value stocks and smaller caps went on a tear. Then the rally fizzled, and large growth resumed its ascendancy.”
Small-Cap History and the Road Ahead
Historically speaking, small-cap value is a potent factor combination, though it’s languished in recent years as growth stocks topped value rivals. Amid signs that smaller stocks are starting to perk up, investors may want to revisit the small-cap value marriage with some added bonuses with PSC.
“In favor of a sustained shift are real fundamental drivers, including a strong forecast for U.S. economic recovery that doesn’t depend on the enactment of a policy agenda. Furthermore, equity valuations support serious upside among value stocks and smaller caps,” according to Morningstar.
PSC is worth a look as the economy rebounds from the ill effects of the COVID-19 pandemic. While investors may flock to the relative safety of large-cap equities during a recession to lessen the blow of market volatility and provide a cushion during 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 to make a value-oriented play.
For more on multi-factor strategies, visit our Multi-Factor Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.