Smaller stocks – both mid and small caps, are lagging their large-cap counterparts and have been for some time. However, when that situation changes in favor of smaller names, the returns could be powerful, underscoring the allure of scooping up ETFs such as the Principal U.S. Small-Mid Cap Multi-Factor Core Index ETF (PSM) while prices are depressed.

PSM is designed to provide broad index-aware U.S. small, mid-cap equity exposure while incorporating a multi-factor model and modified weighting process to potentially enhance the risk/return profile. Multi-factor model seeks to identify equity securities of companies in the Nasdaq US Small Cap IndexSM and Nasdaq US Mid Cap IndexSM that exhibit potential for high degrees of sustainable shareholder yield (value), pricing power (quality growth), and strong momentum. The Fund’s objective is to track the Nasdaq US Small Mid Cap Select Leaders Core IndexSM.

There are well-documented benefits ascribed to smaller equities.

“A smaller company, on the other hand, may have years of growth and price appreciation still to come,” reports Smarter Asset. “From an investor perspective, that means there are opportunities to get in on the ground floor with an up-and-coming company. Buying and holding shares when the company is still small could pay off if it grows and share prices increase in value. If the company does well, it could eventually move from small cap to large cap status.”

PSM Has Multiple Benefits

There are plenty of cost-effective, broad market ETFs on the market today, but while these funds typically hold massive numbers of these stocks, these products also tilt toward large-cap equities. A prime benefit of PSM is that addresses mid and small-cap equities under one roof.

“Relative to bigger companies, small-cap companies show significantly higher growth potential. Most small-cap companies enjoy a larger room for future growth compared to large-cap companies, making them attractive options for investors,” notes the Corporate Finance Institute. “The relative returns of small-cap indices such as S&P600 and Russell 2000 significantly outperform the S&P500 index returns. For small-cap companies, it is easier to grow significantly their operational and financial base than is the case for most large-cap stocks.”

PSM allocates about 43% of its combined weight to industrial, technology, and healthcare stocks.

PSM is defined as “index-aware and provide a balance of potential outperformance and limited tracking error to established market-cap weighted benchmark,” according to Principal.

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.