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 (
), have added about 7.4% in the past month, compared to a gain of
just under 4% for
and nearly a flat return for
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
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
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 (see more ETFs in the
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 (see all the
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
SPDR S&P 600 Small Cap Value ETF (
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
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
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
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.
Vanguard S&P Small-Cap 600 Value ETF (
This ETF tracking the same index could also be an exciting pick for
investors. The fund holds about 444 companies in its basket while
volume is rather weak and charges investors a fee of 24 bps a year.
Still, the product is unpopular with $30.4 million in AUM.
Like its SLYV counterpart, the product is widely spread out across
each security and sector, as no single company accounts for more
than 1.1% of total assets. From a sector perspective, financials
occupy the top position at 22.7% while industrials, consumer
discretionary and information technology round off to the next
This product also has a top Zacks ETF Rank with a similar risk
outlook, suggesting that it is poised to outperform in the long run
and especially over other choices in the space (read:
Zacks ETF Rank Guide
). The ETF added 6.4% in the past three months, and is up over
First Trust Small Cap Value AlphaDEX Fund (
For a slightly more 'active' choice in the mid cap world, investors
should consider FYT for quality exposure. The fund is a bit pricey,
as it charges 70 basis points a year in fees, and trades in small
volume. It has managed assets worth $46.7 million so far in the
The reason for this extra cost is the AlphaDEX methodology, which
seeks to taper the small cap space to only the best positioned
companies. It ranks the stocks in the space by various growth and
value factors, eliminating the bottom ranked 25% of the stocks.
As such, FYT should generate positive alpha relative to traditional
passive indices since it uses AlphaDEX methodology and allots
higher weights to more favorably ranked firms.
There are about 258 stocks in this fund's basket, with industrials
and consumer discretionary taking the top two spots (read:
3 Industrial ETFs to Buy After Solid GE
). The product is well spread out across individual securities as
no single firm holds more than 0.75% of assets.
Insight Enterprises, Ebix and Stewart Information Services
Corporation occupy the top three positions in the basket.
The product has a top Zacks ETF Rank of 1 or 'Strong Buy' rating
with Medium risk outlook though, and is poised to lead the market
higher. The fund has moved higher by 4.5% in the last three months
and over 21.1% in the year-to-date timeframe.
To sum up, small caps have been surging for much of 2013 on the
back of high betas and their focus on the booming U.S. market
3 Small Cap ETFs Leading the Market Higher
Since most of the ETFs in this category have risen significantly on
this trend, investors shouldn't forget the small cap space and
should take a closer look at a few of the top ranked ETFs in this
sector for excellent exposure and some more outperformance in the
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FT-SC VALUE AD (FYT): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
SPDR-SP6 SC VL (SLYV): ETF Research Reports
VANGD-SP6 VALUE (VIOV): ETF Research Reports
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