With broad market indexes like the S&P 500 and the DJIA at all-time highs, many investors are just focused on large cap stocks. However, small cap benchmarks, like the Russell 2000, are also doing quite well, and on a YTD look, have actually outperformed their large cap brethren.
In fact, the top small cap ETF, (IWM - ETF report) , has added about 19.4% in the past six months compared to a roughly 16% gain for (DIA - ETF report) and a 15.5% move higher in (SPY - ETF report)
It is also worth noting that small caps were underperforming in the early part of the second quarter and are leading the way higher now that we are deeper into Q3 (read Winning ETF Strategies for the Second Half).
Given this, it is pretty clear that small caps are in charge of this market rally and could be an excellent choice for investors seeking a top pick in today’s market environment. Plus, small caps are usually much more domestically-focused, which could help this cap level hold up better than their more globally-exposed peers, especially with the myriad of woes hitting a number of developing nations.
How to Play
While a pick of IWM is certainly a way to go in order to obtain broad exposure to the small cap space in a very liquid form, there are actually a few other, less well-known small cap ETFs that have outperformed this ultra popular fund. Below, we highlight three of these better-performers, any of which could make for an interesting addition for investors seeking more small cap exposure at this time:
PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS - ETF report)
This ETF takes a technical look at the small cap market, following the Dorsey Wright SmallCap Technical Leaders Index. This benchmark looks to only include small cap stocks that have powerful relative strength characteristics for inclusion in the benchmark.
This pushes the total number of companies included in the ETF down to 200—from a possible universe of 2,000—although it does push up total costs to the 0.61% level. This makes the ETF a bit pricey when compared to funds like IWM, especially considering that DWAS is more thinly traded (see New Small Cap Technical Leaders ETF Debuts).
In terms of sector exposure, consumer discretionary takes the top spot at 26.6% of the total, followed by 18.9% in health care, and 16.6% in financials. Assets are also well spread out, with no single company taking up more than 2% of the ETF.
So far in 2013, DWAS has crushed the competition, posting a solid gain of 32.75% since the beginning of January.
WisdomTree SmallCap Earnings Fund (EES - ETF report)
For a slightly different approach to the small cap market, investors may want to consider EES, as it follows earnings generated companies in the small cap universe of the U.S. stock market. Furthermore, the fund looks to weight by earnings, giving bigger weights to firms that earn more, irrespective of market capitalization.
This results in a portfolio of roughly 900 securities although costs are still relatively cheap at 38 basis points a year. This means that this fund is on the cheaper side, though it is still pricier than many of its more liquid and popular components in the space (read Focus on Earnings with These ETFs).
Sector wise, this ETF is heavy in financials and consumer discretionary stocks, as these two account for more than 20% of the portfolio each, followed closely by industrials and technology. Assets are well spread out across the components though, as only one company accounts for more than 1% of the portfolio.
The fund’s performance this year has been stellar, adding a little over 27% in the YTD time frame. The ETF also has a solid track record over long time periods, having posted gains of over 35.6% over the trailing one year.
PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD - ETF report)
If investors are looking for a concentrated bet in the small cap space, PSCD is a compelling choice. The fund tracks the S&P SmallCap 600 Capped Consumer Discretionary Index, giving investors direct access to companies that are most exposed to the U.S. consumer.
The fund holds about 100 stocks in its basket, so it will be a bit more concentrated than some of its peers on the list. However, the cost is much cheaper here, charging investors just 29 basis points a year in fees (see 3 Overlooked Ways to Target Consumers with ETFs).
In terms of top holdings, the fund does a pretty good job of spreading out assets, as no single company accounts for more than 3.3% of assets. Some of the top holdings include Brunswick Corp (BC), Wolverine World Wide (WWW), and Fifth & Pacific (FNP).
This fund has also been an impressive choice so far in 2013, adding just under 31% since the start of the year. The product has also added about 46% in the trailing one year period, further underscoring how incredible the U.S. consumer had been in this market recovery.
Small caps have been surging for much of 2013, and now they have begun to pull away from the rest of the U.S. market pack. Part of this reason is due to their higher betas, while it also helps that securities in this space are more focused on the booming U.S. market (Read 3 All-American ETFs to Buy Now).
While pretty much every ETF in this category has risen significant due to this trend, a few have managed to surge above the rest. These securities could make for compelling picks in today’s type of market environment, and be the real winners if current small cap-favoring trends continue.
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