The growing fear about the health of the international economy,
especially the emerging nations, has led investors to shift
their focus to the U.S. economy, which although not entirely immune
to the challenges, has still shown promise since the second half of
2012. Notably, mid and small cap stocks have played a vital role in
carrying the bullish momentum.
Given this improving trend in the U.S. market and the assuring data
from Europe, equities could be set to rise higher in the days
ahead. While there are some bumps in the road ahead like the
possible tapering of the Fed's bond buying program or Syrian
issues, longer-term bullish sentiment for stocks remains unruffled.
History has shown that smaller companies generally bounce back in a
reviving economy faster than the larger ones. Hence, we might see
an upturn in small companies in a market which has been bestowed
with better job, inflation and to some extent housing data (Read:
Play Surging Health Care with These Small Cap
Small-cap stocks are generally focused on the domestic economy
which makes them unperturbed in the present global doldrums. That
is why, in our opinion, pure U.S. exposure can best be achieved via
small cap securities.
Last but not least, while it is not yet known whether the central
bank will begin to slow down the bond buying program from this
month or later this year, the market is already prepared for the
inevitable move. We thus can expect lesser volatility even after
the step is formally taken.
Given this bullish trend, a look at some of the top ranked ETFs in
the space could be a good way to target the best of the segment.
One way to find a top ranked ETF in the small-cap space is by using
the Zacks ETF Ranking system (read:
Zacks ETF Rank Guide
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box or asset class see all the
Zacks ETF Categories here
). Our proprietary methodology also takes into account the risk
preferences of investors. ETFs are ranked on a scale of 1 (Strong
Buy) to 5 (Strong Sell) while they also receive one of three risk
ratings, namely Low, Medium or High.
The aim of our models is to select the best ETFs within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, the Zacks ETF Rank reflects the expected return of an
ETF relative to other products with a similar level of risk (see
more in the
Zacks ETF Center
For investors seeking to apply this methodology to their portfolio
in the small-cap space, we have taken a closer look at the highly
ranked IJR. This ETF has a Zacks ETF Rank of 2 or 'Buy' (see the
full list of
) and is detailed below:
Launched in May 2000,
iShares Core S&P Small-Cap ETF
) is a passively managed ETF designed to track the performance of
the S&P SmallCap 600 Index. The fund has been designed to tap
small cap securities of the U.S. equity market.
The fund is one of the popular choices in the small-cap space with
about $11 billion in AUM. Holding 603 stocks in its basket, the
product puts only 5.75% of its total assets in the top 10 holdings,
suggesting minimal concentration risk. As such, we have a
'Low' risk outlook for IJR in the near term (Read:
Buy This Top Ranked Small-Cap Value ETF
The product is well diversified across each security as none of
them holds more than 0.68% of the assets. Cubist Pharmaceuticals,
Questcor Pharmaceuticals and Gulfport Energy hold the top three
positions in the basket.
This choice is an inexpensive one in the small-cap ETF space with
17 bps of annual fees which is lower than the average expense ratio
of the space. The fund is also liquid with a daily trading volume
of around 900,000 shares which takes the second spot after
iShares Russell 2000 Index Fund
The fund structure follows a blend style. Greater exposure to blend
style also calls for lower volatility. Notably, the fund has almost
all its coverage in the U.S. which clearly explains why it can be a
wise bet in a global slowdown.
The fund returned a robust 25.0% in the one-year period ending
August 30, 2013 and about 18.0% in the year-to-date time frame. In
fact, IJR has beaten the S&P 500 index over the past three,
five and ten years.
The product also pays an annual dividend yield of 1.37%. IJR hit a
low of $70.94 and a high of $98.34 over the last one year. The fund
is currently hovering around its 52-week high price.
While small caps are often capable of higher levels of growth than
large caps, these can also be subject to increased volatility.
Given this, amongst the top performing small-cap ETFs, IJR has a
lower risk outlook, thus defying the usual nature of small-caps,
and potential for greater return.
Further, the fund is inclined to the financial sector, which came
up with strong corporate earnings and an upbeat outlook in the
latest season, and should send this category to another rally this
fall as well.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
ISHARS-SP SC600 (IJR): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report