These ETF Options Buck Success in Small-Cap Space
Data suggests actively managed funds frequently lagged their benchmarks and many come with high fees, diminishing the allure of such funds. This is also true at the small-cap level where active managers have struggled to beat their benchmarks.
However, there are some actively managed exchange traded funds (ETFs) with the potential to buck the trend of active management failings in the small-cap space, including the iShares Enhanced International Small-Cap ETF (NYSEArca: IEIS). IEIS debuted just over two years ago and is the small-cap answer to the iShares Enhanced International Large-Cap ETF (NYSEArca: IEIL) .
The small-cap segment was able to jump on the risk-on sentiment in March after the Fed stated it would only hike interest rates two times later this year, or downwardly revised from the four hikes it expected back in December. The extended low-rate environment has been a boon for smaller companies that have capitalized on cheap debt in their balance sheets.
Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.
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As an actively managed ETF, IEIS does not follow an index so its "management style of this and other actively managed ETFs can result in a much higher turnover rate in the portfolio than passively managed funds. Stock selections are based on a fundamental analysis-based proprietary methodology developed by BlackRock that measures balance sheet data, including price-to-book (P/B), cash flow, revenues, earnings and dividends. To limit volatility, the fund also seeks companies that are beta-neutral with the overall market. The fund is the only actively managed international small-cap fund in the ETF universe," according to Investopedia.
At the end of March, the top 10 holdings in IEIS accounted for just over 20% of the ETF's weight, according to BlackRock data. The ETF had a beta against the S&P 500 of 0.92 and a price-to-earnings ratio of about 11.5, according to issuer data.
"As measured by its performance versus passively managed, index-based funds, the BlackRock formula for active portfolio management appears to be working for the iShares Enhanced International Small-Cap ETF. The key challenge for this fund is that actively managed funds as a whole have experienced difficulties gaining traction with investors since being introduced in 2008," adds Investopedia.
IEIS charges 0.49% per year, or $49 for each $10,000 invested. That is low among actively managed small-cap funds.
For more information on the Small Cap ETF market, visit our Small Caps category .
iShares Enhanced International Small-Cap ETF
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This article was provided by our partner Tom Lydon of etftrends.com.