EWSC Could Be an Excellent Idea for Small-Cap Diversification | ETF Trends

Stock picking in the small-cap arena is tricky, and plenty of professionals fail to beat their benchmarks here, underscoring the utility of passive instruments, including exchange traded funds.

While many traditional small-cap ETFs don’t have concentration risk on par with large-cap rivals, the Invesco S&P SmallCap 600 Equal Weight ETF (EWSC) ensures that investors are making a highly diverse small-cap wager.

EWSC, which turned 11 years old last month, follows the S&P SmallCap 600 Equal Weight Index — the equal-weight offshoot of the widely observed S&P SmallCap 600. The ETF’s equal-weight methodology is something for investors to consider as some market observers are bullish on smaller stocks as ideas for 2022.

Wells Fargo recently highlighted its list of quality small-cap ideas for 2022, and the group includes some EWSC member firms.

“Factor-wise, the portfolio is a touch more expensive—a worthwhile trade-off for having higher quality (particularly lower-leveraged), lower risk, and more stable earnings tilts,” says Well Fargo Head of Equity Strategy Chris Harvey. “It also is higher-yielding, contrarian (lower momentum), lower growth, and less-liquid names.”

Among Wells Fargo’s quality small-cap consumer discretionary names are Century Communities (NYSE:CCS) and Signet Jewelers (NYSE:SIG), both of which are EWSC member firms.

The bank is also constructive on several small-cap financial services firms, including EWSC holdings BankUnited (NYSE:BKU) and KKR Real Estate Finance Trust (NYSE:KREF). Overall, EWSC has an 18.61% weight to that sector — a plus ahead of rising rates. The Federal Reserve could raise interest rates three times this year, perhaps more, and that could be a boon for EWSC because small-cap financials are highly sensitive to changes in interest rates.

Industrials — EWSC’s second-largest sector weight at 14.66% — are another source of quality for the ETF, as Applied Industrial Tech (NYSE:AIT), Brady Corp. (NYSE:BRC), and Hub Group (NASDAQ:HUBG), all of which are EWSC components, appear on the Wells Fargo list.

Tenable Holdings (NASDAQ:TENB), a small-cap cybersecurity software company, also makes the Wells Fargo list. The EWSC holding also appears on other Wall Street lists of tech stocks with significant upside potential this year.

Indicating that equal-weight works with small caps, EWSC is beating the cap-weighted S&P SmallCap 600 Index by nearly 600 basis points over the past 12 months.

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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.