A Small-Cap Smart Beta Idea For 2018

It took a while for U.S. small caps and the related exchange traded funds to get going in 2017, but the group is ending the year on a strong note. An idea among smart beta small-cap ETFs to consider in 2018 is the JPMorgan Diversified Return U.S. Small Cap Equity ETF (NYSEArca: JPSE).

JPSE reflects the performance of the Russell 2000 Diversified Factor Index, which is comprised of small-cap equity securities in the U.S. selected based on a rules-based proprietary multi-factor selection process that screens for relative valuation, momentum and quality. Stocks are also weighted to diversify risk across individual equity securities. According to J.P. Morgan, this process has historically helped drive strong performance.

While JPSE is a multi-factor ETF, one of the investment factors it taps is the value factor. Small caps and value have historically been a potent combination. The outperformance may be attributed to the small-cap, value-oriented ETFs’ tilt toward favorable sectors in the current market environment. Specifically, financials and industry, two outperforming sectors in recent weeks, make up a large portion of the funds’ underlying holdings.

“The approach is working. Year-to-date, JPSE is up about 13%, an advantage of nearly 100 basis points over the Russell 2000 Index. Additionally, JPSE is outperforming the Russell 2000 Value Index by a better than 2-to-1 margin. JPSE is also outperforming the S&P SmallCap 600 Index this year,” according to Investopedia.