What Can Small-Cap Multi-Factor ETFs Do for You? | ETF Trends

With small-caps surging to end 2020 and market observers are forecasting a rebound for multi-factor strategies next year, the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC) is in a uniquely advantageous position.

PSC’s underlying benchmark, the Nasdaq US Small Cap Select Leaders 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.

While some multi-factor ETFs are lagging behind cap-weighted rivals this year, the opposite is true with PSC. The Principal ETF is beating the S&P SmallCap 600 Index by about 250 basis points year-to-date.

PSC YTD Performance

Less Value, More Quality/Momentum

Value is one of the reasons some multi-factor ETFs are trailing this year. Fortunately, PSC isn’t heavily allocated to that factor.

“This is not the first time we have seen an underperformance of value. Value lagged significantly during the run-up to the dotcom equity bubble in 1998/2000. It then recovered. This year, the underperformance of value has been particularly severe. Our research suggests no factor has previously underperformed to the extent value has this year. However, since early November,  we have seen something of a correction with value outperforming growth. It remains to be seen if this is temporary or a change in the trend,” according to BNP Paribas.

PSC is worth a look as the economy rebounds from the ill effects of the COVID-19 pandemic. While investors may flock to the relative safety of large-cap equities during a recession to lessen the blow of market volatility and provide a cushion during market downturn, small-cap performance is worth watching as the economy exits a recession. As such, investors may want to give small-cap equity funds a look now to make a factor-oriented play.

PSC’s quality and momentum traits should serve investors well again next year.

“Quality did extremely well across all regions, as did momentum. The performance of low risk varies by region, but previously it was good across all,” notes BNP Paribas.

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.