Small-cap stocks and the corresponding exchange traded funds have recently been outpacing their large-cap counterparts prompting some market observers to speculate that smaller stocks could be in for a lengthy period of out-performance.
Some fundamentally-weighted small-cap ETFs could deliver even more impressive returns as more investors revisit the small-cap category. That group of funds could include products such as the PowerShares DWA SmallCap Momentum Portfolio (NasdaqGM: DWAS).
DWAS follows the popular Dorsey, Wright & Associates proprietary selection methodology that is designed to identify small-cap firms with positive relative strength characteristics in an attempt to follow companies with strong forward momentum. The ETF follows the Dorsey Wright SmallCap Technical Leaders Index.
Various data points suggest small-caps have momentum in the current environment. Favorable fundamental factors include the recent U.S. tax cuts.
“In the three years ending December 2017, the companies in the S&P SmallCap 600 Index had an average effective tax rate 4.3% higher than the S&P 500 Index,” according to Invesco. “Investors looking for stocks that may experience improved profitability due to US tax reform have turned to the small-cap sector.”
Favorable Outlook for Small Caps
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. Additionally, small-cap earnings estimates are improving.