While small-caps can provide ample growth opportunities, getting factor exposure to value and momentum could open up even more avenues with the Invesco S&P SmallCap Value with Momentum ETF (XSVM).
Small-cap equities in particular could be subjected to large moves in the market. They were outperforming their large-cap peers to start 2021, but momentum is now on the side of large-caps, as seen in the Russell 2000 and the S&P 500 — the former is up about 11%, while the latter is up 16%.
So how can ETF investors capture the strongest upside in small-cap equities? Adding a factor layer of momentum and value could help — momentum can find sustainable price trends while value can find quality holdings.
At a total expense ratio of 0.39%, XSVM seeks to track the investment results (before fees and expenses) of the S&P Small Cap 600 High Momentum Value Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
Compared to the performance of the Russell 2000, the addition of momentum and value in XSVM have paid off for investors handsomely. Within the last 12 months, the fund is up almost 90%.
Seek Where Others Aren’t Looking
With the markets recently getting doused with volatility, it’s easy to seek the safe haven shelters of large-caps. Large-caps can help mute the effects of a sharp market downturn, but it can also help to look for opportunities where the herd isn’t looking, such as small-caps.
“With the market at all-time highs, it’s about looking where people aren’t and I think that’s small caps right now,” said Jeff Mills, chief investment officer at Bryn Mawr Trust, noting the aforementioned strength in small-caps to start 2021 as large-caps have outpaced them in recent months.
Nonetheless, investors shouldn’t be dissuaded by the recent short-term moves. Over time, small-caps can still provide better growth opportunities for gains.
“In the beginning of the year what you saw were investors moving to small caps, moving to cyclicals because everybody anticipated this unabated economic recovery. I think as economic data started to slow down as delta started to come into the fray, I think people started to move away from that and actually huddle into large cap so that is the more crowded trade right now,” Mills said.
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