As investors look to opportunities in an extended bull market environment, consider small capitalization stocks for their growth potential and smart beta ETF strategies to diversify risks and potentially enhance returns.
On the recent webcast (available on demand for CE Credit), Harness the Power of Multi-Factor Investing, Marc Chaikin, CEO of Chaikin Analytics, explained that factor investing is simply any investment theme relating to a group of securities that can help explain their risk and return, including size, value, quality, momentum and volatility, among others.
However, Chaikin warned that single factors exhibit a highly cyclical nature from year to year, which leaves market timing hard to predict. Consequently, investors may combine the various factors to create a more diversified solution to enhance returns over time.
“While factor performance has historically been cyclical, most factor returns generally are not highly correlated with one another, so investors can benefit from diversification by combining multiple factor exposures,” Chaikin said.
Salvatore Bruno, Chief Investment Officer and Managing Director of IndexIQ, also argued for the benefits of small-cap exposure, such as the category’s historical outperformance to large-caps over time and the ability to recover faster from market downturns. Furthermore, small-caps have also outperformed large-caps during periods of rising rates since higher rates typically accompany periods of higher growth and small caps have historically grown faster as they grow off a smaller base. Smaller companies also have lower debt, so earnings are less impacted by rising rates.