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Evaluate ESIX for Small-Cap Rebound Idea

This is the time of year when investors start getting optimistic about how stocks will close the year while focusing on expectations for better equity market performance in the following year. There’s evidence that good times could be emerging, as highlighted by a 5.33% gain by the S&P 500 over the past month. Small-cap stocks are performing slightly better, as highlighted by a 5.66% jump by the S&P SmallCap Index over the same period. That could be a sign that the SPDR S&P SmallCap 600 ESG ETF (ESIX) is primed for more upside over the coming weeks and into 2023.

ESIX follows the environmental, social, and governance (ESG) offshoot of the S&P SmallCap 600 Index and could be an ideal avenue for investors seeking the often-elusive combination of the growth prospects offered by small-cap equities, along with a dash of quality — something that’s not always a hallmark of old guard small-cap gauges.

“Last year we said small-cap Quality was historically mispriced, but did not think the macro environment favored small caps over large caps,” noted Wells Fargo in a recent report. “Going forward, we still believe in a High Quality approach, and we now expect small caps to outpace large caps.”

ESIX is designed to be a fraternal twin of sorts to the standard S&P SmallCap 600 index funds and ETFs with an ESG overlay, but that overlay is meaningful because it trims the ESIX lineup to 381 holdings. Still, that’s an expansive lineup when it comes to small-cap ESG ETFs and one that provides investors with ample diversification. ESIX also has the depth necessary to position investors to capitalize on small-cap earnings growth.

“In general, we are taking a ‘FIFO approach’ to EPS revisions and believe companies that are already managing down expectations offer a slightly better risk/reward, all else being equal,” according to Wells Fargo.

An overlooked point in ESIX’s favor is that it’s levered to a potential small-cap growth rebound because the SPDR ETF allocates about 36% of its weight to technology, consumer cyclical, and healthcare stocks.

However, the broader small-cap space, including the aforementioned growth groups, are offering unusual value today. In fact, over the past two decades, there have been just nine examples of small-cap equities, broadly speaking, trading 20% below long-term averages. That’s the case today.

ESIX charges just 0.12% per year, or $12 on a $10,000 investment, and none of its holdings exceed a weight of 0.90%.

For more news, information, and strategy, visit the ESG Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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