On March 17, 1990, a boxing match between Julio Cesar Chavez and Meldrick Taylor, dubbed “Thunder Meets Lighting” pitted two undefeated world champion pugilists vying to keep a loss off their unblemished records. With Taylor winning much of the fight on the scorecards, an accumulation of devastating punches by Chavez caused the referee to eventually stop the bout in the 12th and final round, giving Chavez the victory–is the VictoryShares US Small Cap Vol Wtd ETF (Nasdaq GM: CSA) suffering the same fate against the large-cap focused VictoryShares US 500 Volatility Wtd ETF (NasdaqGM: CFA)?
Tale of the Tape
CSA seeks to provide investment results that track the performance of the Nasdaq Victory US Small Cap 500 Volatility Weighted Index, which is an unmanaged, volatility weighted index. The index identifies the 500 largest, profitable U.S. companies with market capitalizations of less than $3 billion measured at the time the index’s constituent securities are determined.
On the other side, CFA seeks to provide investment results that track the performance of the Nasdaq Victory US Large Cap 500 Volatility Weighted Index, which is an unmanaged, volatility weighted index. The index itself identifies the 500 largest, profitable U.S. stocks by market capitalization measured at the time the index’s constituent securities are determined.
Rounds 1 through 9
In a matchup of CSA versus CFA, CSA was similar to Taylor–quicker with the edge on hand speed versus Chavez–like CFA, the relentless hitter with heavy hands. In the year-to-date chart, CSA took the early lead around the middle of May, which is the same way Taylor boxed his way to an early advantage in scoring.
“One of our criteria is that companies have to be profitable,” said Mannik Dhillon, President of Victory Shares and Solutions at Victory Capital, told ETF Trends. “That actually eliminates more companies in the small cap space and essentially gets rid of the ‘junk.’ This can have a bigger impact on relative performance compared to a lower quality index like the Russell 2000.”
In May, however, the tide turned, and investors began gravitating to small caps versus large caps. When looking at the three-month chart, an unrelenting CFA seems to have regained advantage as CSA appeared to be fading. Yet sentiment can be mercurial, and nobody can anticipate these shifts with any real consistency.
“When additional capital and demand goes into small caps, CSA is a great way to get diversified exposure, but we think a properly diversified portfolio should have an allocation to both small and large because it’s difficult to time the market sentiment with regard to small or large leadership,” added Dhillon.
The current bull market has been blazing down a path marked by FANG stocks, but this year has also seen a resurgence in small cap equities as evidenced in the upward trajectory of the Russell 2000. However, within the past three months, CFA has regained the lead as large-cap tech companies like Apple led the rise to record-breaking levels in August, which saw the S&P 500 officially become the longest bull market recorded.
“The nice thing about CFA is that it isn’t beholden to mega caps and large caps. It’s risk-weighted methodology seeks diversification across those 500 largest companies so performance isn’t dictated by one or two stocks or narrow segments of the market,” said Dhillon.
If the number of months are akin to a 12-round fight, then there are still three rounds left to determine the victor–can CSA out-quick CFA to a victory, or will the larger stocks of CFA eventually outpoint CSA?
For more market trends, visit ETF Trends.