Small-cap stocks and the related exchange traded funds are following their large-cap brethren lower this year. That’s surprising. After all, it’s a lot to ask of an asset class that’s more volatile on a relative basis to stand strong in a market environment such as the current one.
That’s the accurate, bad news, but investors would be doing themselves a disservice to completely gloss over small-cap stocks and ETFs today. In fact, now could be an opportune time for market participants to at least evaluate putting the size factor to work for them, particularly if they have long-time horizons.
Some attractive points bolster that assertion, including the facts that small-caps are offering superior earnings growth relative to their bigger peers while sporting more attractive valuations. Alone, either or notable, but to get both at the same time under the umbrella of a single ETF is a rarity.
With those sources of allure in mind, some of the following small-cap ETFs may worth considering over the near-term.
ProShares Russell 2000 Dividend Growers ETF (SMDV)
As noted above, small-cap stocks and ETFs can be ideal investments for investors looking for long-term portfolio additions. Add dividends to the mix and that utility increases. Enter the ProShares Russell 2000 Dividend Growers ETF (SMDV).
Many investors, particularly novices, don’t readily associate smaller stocks with dividends, but that picture is changing for the better in recent years. SMVD follows the Russell 2000® Dividend Growth Index and holds just 99 stocks, confirming there are barriers to entry to small-cap dividend ETFs. However, that exclusivity can work in investors’ favor. SMDV’s index has a minimum dividend increase streak requirement of 10 years.
“Recent price weakness has left large-cap valuation metrics below their recent three-year averages," according to ProShares research. "But small- and mid-cap stocks offer an even more compelling value. Relative to large caps, price-to-book ratios for smaller stocks are trading at roughly half of large caps."
Invesco NASDAQ Future Gen 200 ETF (QQQS)
The Invesco NASDAQ Future Gen 200 ETF (QQQS) is the new kid on the small-cap ETF block having debuted earlier this month. Despite that rookie status, few if any ETFs in this category have the heritage that QQQS possesses.
QQQS follows the Nasdaq Innovators Completion Cap Index, this means the new ETF is part of the storied family of QQQ ETFs, which track the Nasdaq-100 Index (NDX) and related benchmarks. Translation: QQQS is an ideal avenue for investors looking to capitalize on weakness in small-cap growth stocks.
“Companies included in the Invesco QQQ Innovation Suite have always spent considerably more on research and development, and Invesco wanted to capture that same commitment to innovation on a smaller cap-tier,” John Hoffman, Americas Head of ETFs and Index Strategies, Invesco, said in a statement. “By applying a high quality patent screen, the QQQS portfolio will focus on smaller-cap companies with a competitive advantage on certain inventions. This will allow investors to customize their market capitalization exposure to companies who are pioneering the future.”
SPDR S&P SmallCap 600 ESG ETF (ESIX)
The SPDR S&P SmallCap 600 ESG ETF (ESIX) proves it’s possible to marry small-cap equities and environmental, social and governance (ESG) virtues. That could be a compelling strategy today because so many ESG and smaller equities are on sale.
“After suffering bruising losses earlier this year, shares of many small, domestic-focused companies are outshining the large-capitalization stocks that dominate the U.S. equity markets," reports Hannah Miao for the Wall Street Journal. "In October, the S&P 600 small-cap index has risen 5.3%, beating the large-cap S&P 500’s 2.6% increase. For the year, the S&P 600 is on pace to outperform the S&P 500 for the first time since 2016.”
Additionally, ESIX has a heavily domestic-focused lineup, making it ideal for investors looking for a strong dollar buffer.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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