Markets are trading at multi-year highs with the S&P 500 hitting a new high seemingly each passing day. An improving labor market, rebounding auto sales and rising consumer confidence are some of the factors leading the market higher.
While the broad market indices like the S&P 500 and the DJIA are up around 4% in the past one month, small cap benchmarks, like the Russell 2000, have easily out beaten the larger counterparts and are up around 8%.
In fact, the top small cap ETF in terms of assets – iShares Russell 2000 Index Fund (IWM - ETF report) – has added 9.3% in the past month, as compared to a 6% gain for the top large cap ETF SPDR S&P 500 (SPY) and 7.3% gain for the top mid cap ETF Core S&P Mid-Cap ETF (IJH) (read: Five Most Liquid ETFs of 2014).
With things gradually improving on the domestic front, smaller companies are picking up faster than their larger counterparts. Small cap companies usually focus more on the domestic segment as compared to larger companies which tend to have more international exposure.
The outperformance by small caps not only symbolizes increasing demand for such stocks, but also a growing risk appetite among investors. This shows that small caps are the major drivers of this broad market rally and might continue to perform well at least in the short run (read: 3 Foreign Small Cap ETFs Likely to Outperform).
Small Caps ETF in Focus
Though IWM is certainly the most popular choice in this space, below we have highlighted three ETFs that have added around 10% in the past one month and could make for an interesting addition for investors seeking more small cap exposure at this time.
PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD - ETF report)
PSCD is a compelling choice for investors looking for a targeted bet in the small cap space. The fund tracks the S&P SmallCap 600 Capped Consumer Discretionary Index, giving investors exposure to U.S. consumer discretionary companies.
The fund holds a basket of 101 stocks and is relatively cheaper, charging investors 29 basis points as annual fees. The top three holdings of the fund are Kate Spade & Co (4.15%), Live Nation Entertainment Inc (2.93%) and Lumber Liquidators Holdings Inc. (2.60%).
In terms of performance, the fund did pretty well last year and added around 37%. Also, the fund is up 9.4% in the past one month. The trend is expected to continue at least in the short run given that the fund has a favorable Zacks ETF Rank #1 or Strong Buy.
PowerShares DWA SmallCap Momentum Portfolio
DWAS provides investors with a broader exposure to small cap stocks. The ETF tracks the Dorsey Wright SmallCap Technical Leaders Index and manages an asset base of $690.3 million. The index uses a proprietary selection methodology to select companies that demonstrate powerful relative strength characteristics.
As such, the index selects approximately 200 companies from the small cap universe of approximately 2000 companies (see all the Small Cap ETFs here).
The fund is well diversified among individual stocks as none of the stocks form more than 1.8% of total assets. In terms of sector exposure, Health Care takes the top spot at 19.46% of total assets, followed by 18.06% in Consumer Discretionary, and 17% in Information Technology.
With 60 basis points as expenses, the fund is pricey as compared to its peers, though performance-wise the fund clearly impresses investors. The fund has gained around 9% in the past one month, while adding 32.7% in the last one year.
First Trust Small Cap Growth AlphaDEX Fund (FYC - ETF report)
FYC seeks to track the Defined Small Cap Growth Index before fees and expenses.
The index employs the AlphaDEX stock selection methodology to select stocks from the S&P SmallCap 600 Growth Index. The methodology chooses stocks based on different fundamental growth and value factors. The unique stock selection methodology ensures that the fund includes some of the best small cap stocks listed in the U.S. equity markets.
Like DWAS, this fund too holds a basket of 200 stocks which are quite well diversified. None of the stocks form more than 1.33% of the total fund assets. Penn Virginia Corporation (1.33%), Matrix Service Company (1.15%) and BofI Holding, Inc. (1.07%) are the top three holdings.
Sector-wise, the top two sectors, Information Technology and Consumer Discretionary, dominate the fund, each forming a little more than 20% of the total fund assets. Healthcare (15.8%), Industrials (15.5%) and Financials (13.04%) also have decent exposure to the fund.
FYC too has added around 9% in the past one month and is up 29.8% in the last one year.
After delivering stellar returns in 2013, small caps stocks have once again emerged as leaders so far this year. While there is hardly any small cap ETF trading in the red in the last one month, the above three ETFs have clearly emerged as winners in the space. The funds have managed to beat theirs peers and could be nice picks if the current trend in the small cap space continues (read: Play the Market Rally with These ETFs).
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