DESC is also a credible play on the recently passed tax reform legislation. Specifically, smaller companies have historically paid a higher effective tax rate partly because they can not shield earnings abroad in lower tax jurisdictions. The median effective tax rate for the Russell 2000 companies was 31.9%, compared to the 28% for those in the large-cap S&P 500.
Small-cap companies are also domestically focused, with the average Russell 2000 company only generating about 20% of revenue for overseas sources, compared to S&P 500 companies that generate over 40% of revenue from abroad in 2016. Consequently, a greater percentage of these small-cap companies’ revenues and earnings will be taxed at the lowered 21% rate.
Additionally, small companies typically benefit from a faster economic expansion, which may occur under a more lax tax scheme. Furthermore, small-caps are great targets for mergers and acquisitions in an growing economic environment.
DESC charges 0.30% per year, or $30 on a $10,000 investment, a favorable fee among smart beta small-cap strategies.
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