Smart Beta Small-Cap ETF is Soaring

Small-cap stocks and related small-cap ETFs have recently been topping their large-cap rivals in significant fashion. Some smart beta ETFs are getting on that act, including the Schwab Fundamental U.S. Small Company ETF (NYSEArca:FNDA).

Up about 6% over the past month, FNDA hit an all-time high on Wednesday. FNDA, which is almost five years old, features broad exposure to small-cap U.S. stocks but weights them on fundamental measures of size, including sales, retained operating cash flow, and dividends plus share buybacks, rather than market cap.

The ETF has a value tilt. Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations.

Smart With Small-Caps

Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.

Small-caps are focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.

FNDA holds nearly 900 stocks. The ETF allocates 20.6% of its weight to industrial stocks while the consumer discretionary and financial services sectors combine for almost 32% of its weight. Over the past three years, FNDA slightly trailed the Russell 2000 Index, but the Schwab ETF was also less volatile than the small-cap benchmark.

The $3.2 billion FNDA charges 0.25% per year, or $25 on a $10,000 investment, which is an attractive fee among smart beta small-cap strategies. Year-to-date, investors have added $434.68 million to FNDA.

For more on smart beta ETFs, visit our Smart Beta Channel.