Small-cap stocks will finish 2019 as laggards relative to their large-cap counterparts. With just a few trading days left in the year, the S&P 500 is higher by 31.70 percent, well ahead of the average gain of 24.65 percent for the Russell 2000 and S&P SmallCap 600 indexes.
An obvious problem for small-cap benchmarks and the passive exchange traded funds (ETFs) that track them is lack of technology exposure. Both of the aforementioned small stock indexes allocate less than 14 percent of their weight to tech names with an average weight of just 13.70 percent. Conversely, the S&P 500 devotes about 23.10 percent of its roster to tech fare, so with the likes of Apple (AAPL) and Microsoft (MSFT) soaring this year, it's not surprising that small-cap benchmarks are lagging.
The Invesco S&P SmallCap Information Technology ETF (PSCT) can help investors solve the small-cap tech conundrum. Fresh of an all-time high on Thursday, PSCT is higher by 40.20 percent in 2019, easily trouncing the aforementioned, broader small equity indexes.
Courtesy: ETF Replay Green line: PSCT, Gold line: Russell 2000, Blue line: S&P SmallCap 600
Home to nearly $347 million in assets under management, PSCT follows the S&P SmallCap 600 Capped Information Technology Index, the tech offshoot of the aforementioned S&P SmallCap 600. The 77 companies in the ETF are companies that are “principally engaged in the business of providing information technology-related products and services, including computer hardware and software, Internet, electronics and semiconductors and communication technologies,” according to Invesco.
An Interesting 2020 Bet
PSCT components have an average market value of $1.92 billion, which is one way of saying investors aren't going to find high-flying behemoths like Apple, Microsoft or Nvidia (NVDA) in this fund and that's another way of saying PSCT has lagged large-cap tech ETFs this year.
Still, there are reasons to believe small caps can get their respective acts together in 2020 and that some leadership in that scenario could be sourced to the technology sector.
Recovering economies “tend to be the best phase for small-caps,” said Jill Carey Hall, a quantitative strategist at Bank of America Merrill Lynch in a recent interview with Barron's. “That’s one key reason we think we could be poised for a shift from large to small.”
Another reason to consider PSCT in the new year is its leverage to growth stocks (52.24 percent of the portfolio) and the persistence of that factor over value. Some market observers believe, and historical precedent speaks to this point, that if the economy slows, growth stocks will continue trekking higher.
“A combination of slowing economic activity and low inflation means that investors will increasingly seek business models that can work on their own ― independent of the prevailing macroeconomic variables,” according to BlackRock.
Plus, PSCT's avenue to growth comes at a reasonable price. Based on some estimates indicating the Russell 2000 trades at around 20x earnings, PSCT is attractively valued at 17.88x 2020 earnings.
The Wildcard: Semiconductors
An important variable for PSCT heading into 2020 is semiconductors. The industry will finish this decade as the best performer with the PHLX Semiconductor Index more than doubling the returns of the S&P 500.
PSCT allocates about 57 percent of its weight to electronic components and chip makers, giving it substantial leverage to the semiconductor trade, a theme that can cut both ways.
If themes such as 5G and artificial intelligence, among others, can prop up semiconductor demand in 2020, PSCT could reward investors willing to take on some added volatility and maybe, just maybe, outperform large-cap tech funds.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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