While mega-cap tech has led the charge this year, some are beginning to take a look at other areas of the market in search of promising growth plays that have fallen behind. One such opportunity may be found in the so-called Size factor and related exchange traded funds.
According to BlackRock, the size factor has typically outperformed during periods of market recovery relative to other factors. The U.S. economy has improved after the volatility earlier this year, and despite COVID-19 still weighing on the market outlook, smaller companies have yet to shine.
“Investors looking to diversify a portfolio that may be too weighted towards FAANGM securities may want to consider the size factor. Index-tracking ETFs offer several ways to efficiently access size, which will positively benefit from a near-future rebound in U.S. economic growth that will serve as a catalyst for smaller companies,” Bob Hum, US Head of Factor ETFs, said in a note.
Specifically, the iShares MSCI USA Size Factor ETF (SIZE) could provide investors with size exposure by creating a more balanced approach to larger-cap investing. SIZE focuses on large- and mid-cap U.S. stocks with a tilt towards the smaller, lower-risk stocks within that universe. The indexing methodology focuses on a specific factor that has historically driven a significant part of companies’ risk and return.
The iShares MSCI USA Size Factor ETF has outperformed the broad market by 2.7% in the second quarter, mostly supported by strong stock selection relative to the S&P 500 and an underweight to the underperforming health care sector.
SIZE’s top sector weights include information technology 17.0%, financials 14.7%, industrials 14.5%, health care 11.9% and consumer discretionary 10.6%. Top holdings include Tesla 0.4%, Zoom Video Communications 0.3%, Match Group 0.3%, Fedex 0.3% and Pininterest 0.3%. The portfolio’s market cap weights include mega-caps 7.1%, large-cap 32.8% and mid-caps 59.7%.
“Allocating to smaller companies provides a unique set of risks that have historically been rewarded over time, but that may cause the companies to struggle in challenging economic environments. Yet, with the S&P 500 now having one-quarter of its exposure in six securities, and an economic recovery potentially acting as a catalyst for smaller firms, the size factor may be of interest to many investors,” Holly Framsted, Managing Director, US Head of Factor ETFs, within BlackRock’s ETF and Index Investments Group, said in a note.
For more information on factor investing, visit our smart beta category.