What’s Driving Small Cap ETF Performance Right Now?


While investors may like the safety and security of large caps, particularly in today’s uncertain market environment with Covid-19 and a forthcoming presidential election, small caps are starting to show signs of life. What exactly is causing small cap ETFs to heat up right?

“Wall Street has been experiencing a roller-coaster ride over the past few weeks as election uncertainty and lack of additional stimulus continue to weigh on investor sentiments,” a Yahoo! Finance article noted. “Against this backdrop, small caps are clearly outperforming. This is especially true, as the Russell 2000 Index has risen 11.4% over the past three months compared to gains of 6.9% for the S&P 500, 7.8% for the Nasdaq Composite Index and 7.3% for the Dow Jones.”

One of the reasons the article cited was growing optimism from investors.

“Though the latest economic data has been mixed, Americans have become optimistic about the economy with their confidence rising to the highest level in September since the coronavirus pandemic began,” the article added.

If investors still believe that strength could be ahead for small caps, one fund to take a look at is the Vanguard Small-Cap Value Index Fund ETF Shares (NYSEArca: VBR). VBR seeks to track the performance of a benchmark index that measures the investment return of small-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies.

^MSACWISCAP Chart

^MSACWISCAP data by YCharts

A Small Cap Fund with a Multi-Factor Approach

In today’s market that’s brimming with uncertainty surrounding the coronavirus outbreak, it can also help investors to use factor investing to filter out the best opportunities. Nowadays, the focus has been quality and value amid the market uncertainty caused by the pandemic, but investors also shouldn’t miss out on other factors like growth or momentum.

Investors looking for small cap exposure using a multi-factor strategy can use the Principal U.S. Small-Cap Multi-Factor Index ETF (PSC). PSC seeks investment results that closely correspond, to the performance of the Nasdaq US Small Cap Select Leaders Index.

The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index. The index uses a quantitative model designed to identify equity securities (including growth and value stock) of small-capitalization companies in the Nasdaq US Small Cap Index (the “parent index”) that exhibit potential for high degrees of sustainable shareholder yield, pricing power, and strong momentum, while adjusting for liquidity and quality.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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