Small-Cap Enthusiasm Could Benefit This ETF | ETF Trends

Small-cap equities and the related ETFs are bouncing back after an extended period of lagging. Importantly, investors are displaying renewed enthusiasm for the asset class, a theme that could benefit 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.

Even a recent batch of sour economic data isn’t deterring investors from embracing smaller stocks.

“None of that has stopped investors from putting money back into small-capitalization companies—a striking phenomenon, given their fate, more than multinationals’, is intertwined with the health of the domestic economy,” reports Akane Otani for the Wall Street Journal.

Other Reasons to Consider PSC

Adding to the case for PSC is that valuations on small caps are now attractive and that the Principal fund skirts some of the riskiest small-cap sectors.

Historically, the small-cap/value combination has been rewarding, but it took a big hit when value languished during the recently deceased bull market. The tendency of factor leadership to change from year to year underscores PSC’s utility: with the Principal ETF’s multi-factor approach, investors don’t incur the burden of factor timing.

Looking back at historical data, it’s been the large-cap companies that have absorbed the majority of the blow during a crisis, but when it comes to searching for value-infused plays in the market, small caps offer investors an option worth considering.

“Part of the resurgence appears to be driven by investors’ confidence that both the Federal Reserve and the government are willing to do whatever it takes to stabilize the U.S. economy,” according to the Journal. “Interest rates are at rock bottom after a series of emergency rate cuts, and Congress has passed more than $3 trillion in aid to try to support consumers and businesses hit by an unprecedented loss of jobs.”

Up more than 3% over just the past week, PSC is higher by 36.31% off its March lows and resides 6.15% above its 50-day moving average.

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.