Factor Focus With Small-Cap ETF Investing Play

Small-cap stocks are often prized for growth while some investors tap the value factor with smaller companies. Investors looking for a multi-factor approach to U.S. small-caps should consider the Xtrackers Russell 2000 Comprehensive Factor ETF (NYSEARCA: DESC).

DESC tracks the Russell 2000 Comprehensive Factor Index. That benchmark “is designed to provide transparent, cost-efficient exposure to small-cap domestic equities based on five factors – Quality, Value, Momentum, Low Volatility and Size,” according to Deutsche Asset Management.

Traders have often used single factor ETFs to tactically increase or decrease exposure to a desired factor or rotate out a factor exposure in a changing market environment. But there are risks with single factor strategies.

Quality is now the most expensive of all four valuation multiples while value is the least expensive. Potential investors, though, should keep in mind that value has the second lowest expected earnings-per-share growth rate among the major factors, the highest debt-to-equity ratio and lowest return on equity. Meanwhile, momentum has the highest expected earnings growth.

Value stocks typically cover companies that trade at a lower price relative to fundamentals such as dividends earnings and sales, which are then considered undervalued by a value investor.

DESC, which turns two years old in June, holds 1,454 stocks. The ETF allocates over 26% of its weight to the financial services sector and over a third of its combined weight to industrial and consumer discretionary stocks.