Amid a crisis, there can be opportunities arising, such as in the small cap space where pharmaceutical companies are taking advantage of developing treatment options to combat COVID-19. This scenario sets up nicely for investors to take advantage of not only small cap stocks but also small cap-focused exchange-traded funds (ETFs) while there are discounts available.
“Considering that the stock market has a flawless track record of eventually erasing bear market declines, now might be the time to get aggressive and seek out higher-growth small-cap stocks for your portfolio,” a Motley Fool article noted.
A Relative Play in Small Caps
If investors believe that small cap equities will outperform large cap equities, the Direxion Russell Small Over Large Cap ETF (NYSEArca: RWSL) provides a means to not only see small cap stocks perform well, but a way to capitalize on their outperformance versus their large cap brethren. RWSL seeks investment results, before fees and expenses, that track the Russell 2000®/Russell 1000® 150/50 Net Spread Index.
The index measures the performance of a portfolio that has 150% long exposure to the Russell 2000® Index (the “Long Component”) and 50% short exposure to the Russell 1000® Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a small-capitalization over large-capitalization investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.
Concentrated Small Cap Exposure
For investors looking for concentrated exposure in small caps, here are a few Vanguard funds to look at:
- Vanguard Small-Cap Index Fund ETF Shares (NYSEArca: VB): seeks to track the performance of a benchmark index that measures the investment return of small-capitalization stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Index, a broadly diversified index of stocks of small U.S. companies.
- Vanguard Small-Cap Value Index Fund ETF Shares (NYSEArca: VBR): seeks to track the performance of a benchmark index that measures the investment return of small-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies.
- Vanguard Small-Cap Growth Index Fund ETF Shares (VBK): seeks to track the performance of a benchmark index that measures the investment return of small-capitalization growth stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Growth Index, a broadly diversified index of growth stocks of small U.S. companies.
For more relative market trends, visit our Relative Value Channel.