Large cap stocks have recently fallen out of favor with
investors, as losses have begun to mount in S&P 500
securities. Plus, in terms of ETF outflows,
has been leading the pack in recent weeks, as billions have moved
out of this ultra-popular product.
This trend, along with global market weakness, is forcing many
to look at small cap securities for exposure instead. These have
held up reasonably well in this environment, and thanks to more
of a domestic focus, could be better positioned in the months
ahead as well.
However, just looking at the most popular small cap
in the market might not be the best way to play this trend. In
fact, the most popular product in the space, the
iShares Russell 2000 ETF (
, has actually added just over 3.5% in the past three months,
while it is currently sporting a Zacks ETF Rank #4 or 'Sell'
(also see the
Zacks ETF Rank Guide
Fortunately, there are a number of better ranked-and better
performing-ETFs in the small cap space out there. One such fund
that fits this bill is the
WisdomTree Small Cap Earnings ETF (
This product receives a top Zacks ETF Rank of 1 (Strong Buy)
and it has been one of the top three performing small cap ETFs
over the past three months. In fact, its return in this time
frame of 6.64% thoroughly crushes IWM's 3.53% move higher in the
same period, suggesting that investors may want to give this ETF
another look (see
3 Small Cap ETFs Leading the Market Higher
EES in Focus
EES tracks the WisdomTree Small Cap Earnings Index, which is a
fundamentally weighted index that measures the performance of
earnings generating companies within the small-cap segment of the
U.S. stock market. To be included, firms must have generated
positive earnings over the most recent four fiscal quarters, and
be listed (as well as incorporated) in the United States.
It is also worth noting that the index is earnings weighted on
a yearly basis, in order to reflect the proportionate share of
the aggregate earnings each component company has generated. In
other words, companies with greater earnings will have larger
weights in the index, irrespective of their market capitalization
This produces an ETF that has roughly 900 stocks in its
basket, charging investors 38 basis points a year in fees.
Exposure is quite spread out though, as no single company
accounts for more than 1.25% of the total (read
Focus on Earnings with These ETFs
The fund does have a bit of a concentration in certain sectors
though, as financials (24.4%), consumer discretionary (18.8%),
and industrials (17.6%) take the top three spots. The product is
really light in telecoms and utilities, as these account for less
than 3% of the total combined.
While this is both a cheap and outperforming pick in the
sector, it should be pointed out that volume is a little light,
while yield leaves a bit to be desired too. The 30-Day SEC payout
is below 0.8%, while volume is generally below 30,000 shares a
day. This may increase bid ask spreads, though the relatively
liquid nature of the underlying holdings should prevent this from
becoming too big of an issue.
Still, the ETF has been a great pick as of late, and it has
beaten out both its large cap and small cap brethren, suggesting
it could be a solid selection for investors seeking quality
exposure to the U.S. market at this time.
Some investors have begun to focus on small cap securities as
of late, thanks to their domestic focus and better growth
prospects. However, many investors are likely focusing in on
products like IWM that have lagged (see
all the Small Cap ETFs here
Instead, a better play might be in the top ranked segments of
the small cap world, like with a fund such as EES. This product,
thanks to its interesting weighting methodology, has outperformed
as of late and could be a better choice for investors to play the
small cap ETF space to close out the year.
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WISDMTR-SC ERN (EES): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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