Smaller Stocks Seen Perking up, Potentially Benefiting This ETF

Some market observers are displaying in confidence that mid- and small-cap stocks can rally into year end and beyond. Investors can play that trend with an array of exchange traded funds, but the Principal U.S. Small-Mid Cap Multi-Factor Core Index ETF (PSM) provides exposure to both mid and small caps.

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

After a long run of out-performance by mega-cap tech stocks, smaller equities could be ready for the time to shine.

“Small-cap stocks are typically seen as a good bet during an economic recovery, but they have been outpaced by major tech stocks since the depths of the pandemic shutdowns. Since the start of April, the Nasdaq 100 has gained about 54%, while the Russell 2000 has risen 32%,” reports Jesse Pound for CNBC.

PSM Potent for Small and Mid-Caps

In addition to small-cap potency, PSM’s mid-cap exposure is also important. Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

“As the economy starts to rebound and starts to recover from Covid, and hopefully with a successful vaccine in the first half of next year, mid caps and small caps are going to lead the way,” said UBS managing director Xi Qiao in an interview with CNBC.

Sectors she’s bullish on include tech, consumer discretionary and health care. Those groups combine for 47% of PSM’s roster, according to Principal data.

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.

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.