Although concerns over Syria and the taper have eased, markets are still having trouble finding their footing. However, even in this uncertain environment, small caps have been leading the way higher as of late.
In fact, over the past three months, small caps, as represented by the popular ETF (NYSEARCA:IWM), have added about 7.4% in the past month, compared to a gain of just under 4% for SPY and nearly a flat return for DIA in the same time frame.
Investors should note that small caps were underperforming in the early part of the second quarter but are now leading the way. Since small caps are considered to be the barometer of domestic economy, their dominance gives a bullish outlook for the U.S. in the near term (read: Time to Focus on Small Cap ETFs?).
Given this, small caps could be an excellent choice for investors seeking a top pick in today’s market environment. These pint-sized securities usually focus more on the domestic market, helping them to hold up better than their globally exposed peers. This is especially beneficial when a myriad of woes are hitting a number of developing and emerging nations.
Furthermore, by honing in on value stocks in this capitalization level, more safety can be assured to investors. These small cap value funds offer exposure to a wide variety of stocks with value characteristics, such as low P/B, low P/S and low P/E ratios, which reduce risks.
Additionally, value small cap funds tend to exhibit higher risk adjusted returns than large and growth stocks. The additional return that the investor gets in these funds is the risk premium, as both value and small cap stocks are deemed as risky investments.
Further, investors may want to consider cycling into the small cap value space in order to obtain a nice momentum play as we move ahead in the second half of the year. While looking at individual companies is certainly an option, a focus on top ranked small cap value ETFs could be a less risky way of tapping into the same broad trends.
Top Ranked Small Cap Value ETF in Focus
We have found a number of ETFs that have the top Zacks ETF Rank of 1 or ‘Strong Buy’ rating in the small cap space and are thus expected to outperform in the months to come.
While all these top ranked ETFs are likely to outperform, the following three funds could be good choices to tap into the space. This trio has enjoyed a strong momentum in the year-to-date period, and has potentially superior weighting methodologies which could allow it to continue leading the small cap value space in the months ahead.
SPDR S&P 600 Small Cap Value ETF (SLYV)
This underappreciated ETF offers exposure to the small cap value sector of the U.S. equity market, by tracking the S&P SmallCap 600 Value Index. Holding 445 stocks in its basket, the fund provides a nice balance across each security and prevents heavy concentration. None of the securities hold more than 1.04% of the total assets.
In terms of sectors, financials and industrials take the top spots at roughly one-fifth of the total each, followed by modest allocations to consumer discretionary and information technology (read: 3 Surging Financial ETFs Beating the Market).
The product has amassed $198.5 million in its asset base while volume is light, suggesting that bid/ask spreads are relatively wide and that total costs will come in much higher than the 31 bps expense ratio.
The ETF currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook, suggesting that it is positioned to outperform similar competitors. The ETF has gained nearly 5.8% in the past three months and over 20.6% so far in the year.
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