With Small Caps Heating up, Revisit This ETF | ETF Trends

Small-cap stocks are strutting their stuff again and that could pave the way for more upside in the already resurgent Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC).

Up almost 11% over the past month, PSC gives investors a higher quality entry to small stocks, an asset class notoriously rife with money-losing, lower-quality fare.

“As they have for most of the past few years, small-caps trade at a hefty discount to larger companies’ stocks on a variety of valuation metrics,” reports Nicholas Jasinski for Barron’s. “The Russell 1000 trades for 22 times its projected earnings over the next year, while the Russell 2000 is worth just over 18 times. Those are both expensive relative to their own histories, Bank of America Securities equity strategists wrote in a report on Monday, but could come down if earnings revisions rise faster than stock prices.”

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.

A Good Idea Right Now

PSC’s quality purview is important at a time when small-cap valuations, as noted above, may be a bit stretched, a scenario fostered by volatile companies with lumpy earnings trends.

That’s important because smaller companies often sport higher leverage and are more rate-sensitive than their large-cap counterparts. Bolstering the case for PSC are improving small-cap earnings revisions, confirming the group has some earnings momentum.

“Small-caps were generally able to adjust operations and cope with the environment better than analysts had expected them to, and now they are getting more credit for their ability to do so again in the second half of the year,” according to Barron’s. “Wall Street consensus is now for 2020 Russell 2000 earnings per share of about $57. That is up from $42 before the start of second-quarter earnings season.”

Home to nearly $500 million in assets under management, PSC offers a compelling mix of growth and value ideas though it tilts toward the former as healthcare and consumer cyclical names combine for over 34% of the fund’s roster.

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.