Small-cap stocks showed some resilience amid recent retrenchment by mega-cap technology stocks and that could be a positive sign for the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC) going forward.
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.
While in the long-term large cap outperformance versus call caps is apparent, particularly in the last few years, things change when the economy goes south. Since the pandemic sell-offs in March, small caps have rebounded to a greater degree compared to their large cap brethren.
“Small-cap stocks are providing somewhat of a refuge from the rout that tore through equity markets this week, a signal that investors see brighter days ahead for the economy as pandemic lockdowns are lifted,” reports Bloomberg. “Even though the group ended the week in the red, the little guys fell a lot less than bigger companies, especially the tech megacaps that had led the surge in stocks since mid-March. In fact, the Russell 2000 index of smaller firms is on pace to have its best month versus the Nasdaq 100 in more than two years.”
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. That makes PSC all the more relevant today.
“Small-cap companies get a bigger chunk of their profits domestically and generally have weaker balance sheets than their bigger peers, which didn’t bode well for them during a flight to the safest and most stable companies in the midst of the pandemic,” according to Bloomberg.
PSC has some other perks, including lack of international exposure.
“On the flip side, the group is more shielded from geopolitical risks, which are coming to the fore as the U.S. presidential election approaches, tensions with China simmer and Britain’s plan to exit the European Union grows more complicated,” according to Bloomberg.
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.