While the large cap indexes such as the S&P 500 and the DJIA are hitting new all-time highs amid valuation concerns, tapering and geopolitical tensions in Ukraine, the small cap benchmark –Russell 2000 – has been the worst hit by the recent momentum sell-off and is actually underperforming its large cap brethren by wide margins.
This is especially true given that the ultra-popular small cap ETF (IWM) has lost nearly 2.2% in the year-to-date time frame compared to a gain of about 3.21% for SPY and 1.41% for DIA. In fact, the small cap ETF was the worst loser in terms of asset inflow and pulled out $1.6 billion in capital last week, making the fund’s asset base roughly $23.67 billion (read: Short the Nasdaq with These Inverse ETFs).
Small caps, which enjoyed an incredible run since late 2012 and led the broad market rally, are faltering on profit-taking activity and have given back most of their gains over the past two months. This is because these stocks appear much expensive than the large caps cousins, compelling investors to lock in gains at this level.
Even in this backdrop, several small cap stocks have held up strongly in the market turmoil and are crushing the Russell 2000 index. Below, we have highlighted three ETFs that are outperforming in the small cap space and are worth a look given the current market turmoil (see: all the Small Caps ETFs here):
PowerShares S&P SmallCap Energy Fund ((PSCE - ETF report))
This fund provides exposure to the energy sector of the U.S. small cap segment by tracking the S&P Small Cap 600 Capped Energy Index. It is less popular and less liquid with AUM of $54.9 million and average daily volume of about 14,000 shares. The ETF charges 29 bps in fees per year from investors.
Holding 29 securities in its basket, the product is largely concentrated on the top five firms – Bristow Group, Exterran Holdings, Carrizo Oil & Gas, Stone Energy and PDC Energy - with a combined 37.8% of assets. Other firms hold less than 4.82% of total assets.
More than half of the portfolio is tilted toward energy equipment and services while oil, gas and consumable fuels take the rest. PSCE has returned over 9% in the year-to-date time frame and currently has a Zacks Rank of 2 or ‘Buy’ rating with High risk outlook.
Global X Junior MLP ETF ()
This fund targets the master limited partnerships (MLP) corner of the U.S. small cap segment and follows the Solactive Junior MLP Index. In total, the ETF holds 28 securities and has 0.75% in expense ratio. It has amassed $16.4 million in its asset base while trades in paltry volume of under 6,500 shares a day (read: MLP ETFs: Great Picks for the Energy Sector?).
The product is concentrated on the top three firms – Tesoro Logistics, Vanguard Natural Resource and Breitburn Energy – with more than 8% share each, closely followed by EQT Midstream Partners and Atlas Energy at nearly 7% each. Other companies account for less than 4.9% of total assets.
From a sector look, more than half of the portfolio is allocated to oil & gas pipelines and distributions while energy exploration and production round off the top two at 37%. The fund is up 6.2% so far this year.
Vanguard Small-Cap Value ETF ((VBR - ETF report))
This fund provides exposure to the value segment of the U.S. small cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 811 stocks in its portfolio, which is widely spread across individual security. None of the holdings make up for more than 0.5% of assets in the basket.
In term of sector exposure, the fund is dominated by the top two sectors – financials and industrials – at 28.4% and 21.6%, respectively. Consumer services, technology and consumer goods round off the top five (read: 3 Excellent Value ETFs Poised to Outperform).
VBR is quite popular with AUM of more than $4 billion and trades in good average daily volume of about 162,000 shares. Further, the ETF is one of the low cost choices in the small cap space, charging 9 bps in fees per year from investors. The fund has added about 3.5% year-to-date and has a Zacks Rank of 3 or ‘Hold’ rating with Medium risk outlook.
Investors should note that these three products have shown strong resilience to the sharp downturn in the small cap space. This trend will likely continue in the near future given investors desire to shift from small cap stocks to larger, more stable companies.
Further, small caps are considered the barometer of domestic economy and are less susceptible to global economic trends. As the economy gradually improves and investor panic on high-growth securities subside, small caps would lead the market rally, making the above-mentioned ETFs lucrative choices.
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