Optimize Your Portfolio with a Smart Beta, Small-Cap ETF

“Rising rates often accompany high growth expectations, and small caps have historically grown faster as they grow off of a smaller base,” Bruno said. “Small caps typically have less debt, so earnings are generally less impacted by rising rates.”

Furthermore, small-caps are more focused on the domestic economy, so they are more insulated from foreign exchange currency moves that may affect large multi-national companies and are less affected by global events.

Investors interested gaining exposure to small-capitalization stocks while honing in on historically proven factors may consider the recently launched the IQ Chaikin U.S. Small Cap ETF (NasdaqGM: CSML), which tries to reflect the performance of the Nasdaq Chaikin Power US Small Cap Index.

The underlying index applies a shareholder yield screen and the so-called Chaikin Power Gauge, a quantitative multi-factor model that tries to identify securities that are expected to outperform their peers, to select components from the Nasdaq US 1500 Index. The target focus will include small capitalization stocks.

Chaikin explained that the Power Gauge’s factor-based model combines four primary factors, including value, growth, technical and sentiment to select stocks with potential to provide enhanced returns over time.

The value factor includes LT debt to equity ratio, price-to-book value, return on equity, price-to-sales ratio and free cash flow. Technical factors include price trend, price trend rate of change, Chaikin money flow, relative strength vs. market and volume trend. Growth factors include earnings growth, earnings surprise, earnings trend, projected p/e ratio and earnings consistency. Lastly, the sentiment factor includes earnings estimate trend, short interest, insider activity, analyst ratings and industry relative strength.

Financial advisors who are interested in learning more about the Chaikin small-cap strategy can watch webcast here on demand.