A Smart Beta, Institutional Level ETF Strategy to Access the Small Cap Segment

The Chaikin Power Gauge is a 20-multi-factor model that screens for value, growth, technical and sentiment factors, such as price-to-book value, return-on-equity, free cash flow, price trends, relative strength, volume trend, earnings growth, earnings trends, projected price/earnings ratio, insider activity, short interest and earnings estimate trends. The gauge will identify each security’s ability to outperform market-weighted products and active strategies.

Salvatore Bruno, Chief Investment Officer at IndexIQ, argued that a small cap strategy like CSML could benefit investors in the market environment ahead, pointing to supporting factors like the small cap segment’s ability to outperform over periods of rising rates.

As rates rise and the U.S. dollar strengthens against foreign currencies, large-caps may also find overseas revenue taking a hit from the weakening foreign currencies. Alternatively, small caps with a domestic focus are less susceptible to currency risks.

Moreover, long-term investors have also enjoyed small cap exposure as these smaller companies tend to outperform other asset categories over the long haul.

“Small cap stocks have historically outperformed their large-cap counterparts over the long-term, and rebounded from market downturns at a quicker pace,” Bruno said. “Small caps also tend to be more domestically focused when compared to their multi-national large-cap counterparts, allowing them to be insulated from issues that impact revenues from overseas, such as a rising dollar. Therefore, we believe CSML will fit well as a core U.S. small cap equity position, as part of the science behind building smarter portfolios for investors.”

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