The most recent market rally isn’t just a playground for the big boys. Small cap exchange-traded funds (ETFs) have also been having their own fun as they ride the recent wave of optimism on the economy reopening, which is also exhibiting a tilt towards value.
Momentum has been the prevailing factor since the pandemic sell-off back in March, but it could be running out of steam. Per an Investing.com report, “a Dow Jones market-neutral momentum portfolio that goes long the highest momentum stocks and shorts those with the least momentum dropped 9% — the worst day since at least 2002.”
Given this recent move, one fund to take a look at is the Vanguard Small-Cap Value Index Fund ETF Shares (NYSEArca: VBR). VBR seeks to track the performance of a benchmark index that measures the investment return of small-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies.
“If we want to make sense of the market move, we need to not just look at the S&P or the Nasdaq but look beyond that,” said Willie Delwiche, an investment strategist at Baird. “Areas that lagged for years that made much more substantial lows are coming back as the economy transitions from worse-than-expected data to better-than-expected data.”
A Small Cap Fund with a Multi-Factor Approach
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.
Investors looking for small cap exposure using a multi-factor strategy can use the Principal U.S. Small-Cap Multi-Factor Index ETF (PSC). PSC seeks investment results that closely correspond, to the performance of the Nasdaq US Small Cap Select Leaders Index.
The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the 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.
For more market trends, visit ETF Trends.