Play the Small-Cap Resurgence With Multiple Factors | ETF Trends

Don’t look now, but the Russell 2000 Index is higher by more than 20% over the past month, confirming that small-cap stocks are starting to get their grooves back. Beyond traditional funds, an avenue for investors tapping into that trend is the  Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC).

PSC tracks the Nasdaq US Small Cap Select Leaders 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,” according to Principal.

PSC’s recent resurgence could bode well for broader benchmarks due to the economic sensitivity of smaller companies.

“That outperformance is a good sign to some investors, who believe that domestically-focused small cap stocks tend to be more sensitive to economic fluctuations and are among the first areas of the market to reflect both downturns and rebounds,” reports Reuters.

PSC: Making Small Caps Great Again

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.

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. PSC goes beyond. In addition to focusing on quality, the fund’s shareholder yield purview can offer a buffer not found with other small-cap ETFs.

Easing volatility in the small-cap space is another near-term catalyst for PSC.

“Subsiding volatility is another positive sign for small caps, said Julian Emanuel, chief equity and derivative strategist at BTIG in New York. The spread between the Russell 2000 Volatility index .RVX and the S&P 500 Volatility index has narrowed after hitting a high in April, though it remains elevated in historical terms, he said,” according to Reuters.

PSC is higher by 30% off its March lows.

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.