Although volatility levels have increased, the U.S. market
continues to climb upward this year thanks to growing investor
confidence, improving employment data and a recovering economy.
The S&P 500 index remains above the 1,600 level and is up
over 10% year-to-date.
While large caps have taken the lion's share of attention,
small caps could arguably be better plays in today's economy, as
these are safer and could be better positioned if more political
issues creep into the picture (read:
Is This a Better Large Cap ETF?
Why Small Caps?
The confidence in the international economy is fading,
underscoring the tough challenges to emerge out of recession.
Many emerging markets, including China, are also experiencing
slowdown. However, the U.S. economy is on the verge of recovery
with encouraging housing data and lower jobless claims data
Are China ETFs in Trouble?
In such a scenario, a purely large cap focus doesn't seem like
a great strategy as most large and mega cap securities do a
significant amount of business outside of the U.S., implying that
the exposure to large caps isn't likely to be too focused on
American economic health. In fact, the S&P 500 companies
collectively make nearly one-third of their revenues from the
That is why, in our opinion, true domestic exposure can best
be achieved via small cap securities. These pint sized stocks
aren't big enough to be international behemoths, so they are
pretty much entirely focused on the U.S. for their revenues,
potentially making them great choices in a global slowdown. To
substantiate this fact, the small cap index - represented by the
Russell 2000 - generates less than 20% of revenue outside the
This makes these securities perfect for the present, when the
American economy is arguably leading the way. Furthermore, since
these companies are small, they have a much easier time growing
than their already tapped out large cap counterparts (read:
Forget SPY, Focus on Mid and Small Cap ETFs
This trend is expected to continue this year, especially if
emerging markets stay weak and Europe continues to fight debt
issues, according to the analysts at Goldman Sachs (
). The analysts expect that the Russell 2000 Index will generate
14% returns over the next 12 months compared to a modest 6% gain
for the S&P 500 index. The Russell 2000 Index is up roughly
14% so far this year.
Small Cap ETF in Focus
While small caps are often capable of higher levels of growth
than large caps, these can experience levels of volatility as
huge gains and losses can occur in a very short period of time.
In this backdrop, we have highlighted three popular unleveraged
, which could be great choices for investors seeking higher
income in the second half of the year (see more ETFs in the
iShares Russell 2000 Index Fund (
Launched in May 2000, this is by far the largest and the most
popular ETF in the small cap space. The ETF tracks the Russell
2000 Index, a capitalization weighted 200-stock subset of the
Russell 3000 Index.
Holding roughly 2,000 securities, the fund eliminates specific
company risk as it puts just a fraction in each security. None of
the individual securities holds more than 0.34% share. Alaska Air
), Starwood Property (
) and Ocwen Financial (
) are the top three elements in the basket.
However, the product is tilted towards financial services and
consumer discretionary sectors, which together make up for 40% of
the total assets (read:
Banking ETFs: Laggards or Leaders?
IWM has attracted huge inflows this year, suggesting that
investors are embracing a small cap approach. This has propelled
the fund's asset base to roughly $21 billion. Though not a low
cost choice in the small cap space, the product does not involve
any extra cost in the form of bid/ask spread beyond the expense
ratio of 0.25%. This is because it offers extreme liquidity,
trading in volumes of more than 38 million shares a day.
The ETF gained 14.84% in the year-to-date period and yields a
decent 1.50% in annual dividends. The product has a Zacks ETF
Rank of #3 or Hold with a low risk outlook.
iShares Core S&P Small-Cap ETF (
This fund has attracted $875 million in asset base,
accumulating over $10.1 billion in total assets by tracking the
S&P SmallCap 600 Index.
Like IWM, the product is well diversified across each security
as none of them holds more than 0.60% of the assets. Tanger
Factory Outlet Center (
), Gulfport Energy (
) and Cymer Inc (
) hold the top three positions in the basket.
The fund is also spread well across variety of sectors. The
top sector - financial - accounts for roughly one-fifth share,
closely followed by information technology, consumer
discretionary, industrials and healthcare.
Launched in May 2000, the fund charges low fee of 0.16% on
annual basis. Additionally, it trades in daily volume of roughly
900,000 shares, probably ensuring no additional cost. The ETF
returned 15.31% so far in the year and pays a good annual
dividend of 1.20%.
IJR currently has a Zacks ETF Rank of #1 or Strong Buy with
low risk outlook. This suggests that the product would outperform
its counterpart over a one-year period.
Vanguard Small Cap Fund (
This fund tracks the CRSP US Small Cap Index and holds 1,440
stocks in its basket. It has seen inflows of over $700 million,
sending AUM to about $6.2 billion.
The product puts little (not more than 0.3%) in each security
that could keep the portfolio balanced among the various
companies, and prevent a heavy concentration. The top three
holdings include Rock Tenn (
), Onyx Pharma (
) and B/E Aerospace (
From a sector perspective, financials again take the top spot
in the basket with one-fourth of VB while industrials (16.10%),
consumer discretionary (14.90%), information technology (14.70%)
and healthcare (10.70%) rounded off the top five (read:
Two Sector ETFs Posting Incredible Gains
The ETF, launched in Jan 2004, is the low cost choice in the
space, charging only 10 bps in fees a year from investors. But,
its moderate daily volume of roughly 350,000 shares slightly
increases the total cost for this popular fund. The fund is up
16.55% year-to-date and pays decent dividend of 1.59% per
VB has a Zacks ETF Rank of #2 or Buy with low risk
Small caps have been surging higher as of late, and are
considered by many to be the new leaders of the market.
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
ISHARES TR-2000 (IWM): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
VIPERS-SM CAP (VB): 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