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Stock markets are continuing their climb upwards. The benchmark S&P 500 is now firmly above the key 1500 level, while forward looking data has been solid as well.

This has given investors some level of confidence in a rally going forward, especially given the lack of reaction to the sequester and other political issues.

But the rally hasn’t been limited to large caps in the S&P 500 by any means, as mid and small cap have contributed a great deal as well. Mostly in case of a high momentum market surge, like the present one, the companies with smaller market capitalizations often play key roles in determining the longevity of the up-trend.

In fact, the mid and small cap stocks signify whether the trend in the market is supported by the market breadth or not. And the present up trend is surely supported by the market breadth which has resulted in this being one of the strongest surges in recent times. The mid caps have returned around 13% (i.e. S&P Mid Cap 400 Index) in terms of total returns during this present rally (see Top Ranked Midcap ETF in Focus).

Also the Russell 2000 Index, which measures the performance of the Small Cap segment, has returned around 12% during the past three months. Not to mention that the Russell 2000 represents about 2/3rd of the total U.S. equity market breadth.

Therefore it is imperative to imagine that this market uptrend is not just ‘another’ short term bull run due to impulse institutional buying, but a result of improving fundamentals on the domestic as well as global front (see 3 Ways to Play the S&P 500 Rally with ETFs).

Helping the equity market on their trek upwards are the small cap stocks which has provided the much needed momentum as well as confidence. Nevertheless, with the fourth quarter earnings season faring better that most expectations, and positivity reflecting the macroeconomic front, the upside for small caps seems more or less uncapped, at least in the near term.

Against this backdrop, investors seeking exposure in the Small Cap U.S. Equity ETF space can consider the following Zacks Top Ranked ETF:

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk (see more in the Zacks ETF Center).

Using this strategy, we have found a Ranked 2 or ‘Buy’ Small Cap U.S Equity ETF which we have highlighted in greater detail below:

Schwab U.S. Small-Cap ETF (SCHA)

SCHA tracks the Dow Jones U.S. Small-Cap Total Stock Market Index which measures the performance of around 1,750 small cap securities listed and traded in the U.S. stock markets. The index is weighted by the market capitalization of the component companies and adjusted for float (see 3 ETFs at the Heart of the Recent Rally).

The ETF has an asset base of around $871 million and on an average roughly 186,000 shares are traded each day. The ETF charges a paltry 10 basis points in fees and expenses which is more or less in competition with other broad market ETFs. It pays an annual yield of 1.75%.

SCHA currently has a core holding of 1,743 stocks and has returned around 18.31% for the fiscal year 2012. The ETF has a majority of its allocations in the Financial (24.4%), Industrials (19.3%), Information Technology (13.8%) Consumer Discretionary (13.4%) and Healthcare (11.3%) sectors (read Two Sector ETFs to Buy in 2013).

The ETF has a volatility of 24.24% which can be considered moderate given the volatility that most small cap stocks exhibit. This is reflected by our ‘Medium’ risk outlook for the ETF along with a Zacks Rank # 2 or Buy.

This popular fund has easily beaten out the S&P 500 so far this year, thanks in large part to the breadth and depth of the market rally. If you expect this trend to continue, SCHA could be a great pick in order to obtain wide exposure to the small cap space at an extremely low annual cost.

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