If small-cap stocks and ETFs renew their bullishness in earnest, there’s a reasonable chance the Invesco S&P SmallCap Information Technology (NASDAQ: PSCT) will be part of the leadership group. PSCT struggled last month, but the fund is up 24% year-to-date, putting it ahead of a slew of traditional, diversified small-cap ETFs.
PSCT tracks the S&P SmallCap 600 Capped Information Technology Index. While the various sector-specific ETFs provide broad exposure to their targeted segments, investors should keep in mind that there are differences in the different ETF offerings.
Small-capitalization stocks have attracted a lot of attention to the escalating trade tensions, fueled by fears over a potential slowdown in global growth. Consequently, many anticipated that small-caps could weather the storm as large multi-nationals with a large global footprint suffered from trade disputes.
Jim Paulsen, chief investment strategist at Leuthold Group, “argues that small-cap tech looks like a bargain compared with large-cap peers. The S&P 600 Small-Cap Technology index trades at about half the valuation of the S&P 500 Technology index, he writes. That’s down from 0.9 times for small-cap tech in 2013, and it’s well below the 18% average premium for small-cap tech since 2003 (based on a composite valuation of price/earnings, price/book, and price/cash flow),” reports Daren Fonda for Barron’s.
PSCT’s 80 holdings are “are principally engaged in the business of providing information technology-related products and services, including computer hardware and software, Internet, electronics and semiconductors and communication technologies,” according to Invesco.
The fund’s holdings have an average market capitalization of $1.92 billion. PSCT allocates 30% of its weight to semiconductor names and almost 29% to electronic components makers.
While small-cap tech stocks may seem like risky bets in the current environment, there are some compelling reasons to consider the asset class.
“Paulsen argues that if we get slightly better economic data, including a bump in inflation, small-caps should outperform since they tend to do well when inflation is picking up,” according to Barron’s. “He also notes that small-cap tech volatility has spiked, relative to large-cap tech. That has often preceded a period of small-cap outperformance. Analyst price targets for small-cap tech also imply bigger gains, with small-caps expected to appreciate 11% more than large-cap tech peers.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.