2013 turned out to be an excellent year for the equity markets. All of the ten sectors of the S&P participated in the broad based rally. The rally was not only limited to the large caps, but small-cap stocks too participated in the bull market.
In fact, the small-cap stocks delivered better returns than the large caps. The Russell 2000 Index – which measures the performance of the small-cap pocket of the U.S. equity market-- added around 39% in 2013, beating the Russell 1000 Index (measuring the performance of U.S. large-cap stocks) by a 6% margin.
The stellar returns by the small caps were largely due to a recovering U.S. economy. Normally, smaller companies pick up faster than the larger ones in a growing economy. The small-cap stocks are more closely tied to the U.S. economy and generate the majority of their revenues in the domestic market.
Moreover, the Fed, in spite of announcing that the taper will begin this month, has indicated that the key interest rate would continue to remain at a record low for a longer period than what was previously promised. Thus, small caps around the globe are expected to continue their upward trend in 2014 as well (read: 5 ETF Predictions for 2014).
How to Play Small Caps
Although small caps have the potential to offer good returns in a trending market, these stocks are often blamed for increasing volatility. A slight drag in the U.S. economy might disrupt the momentum. Thus, for investors willing to add return to their portfolio via the equity markets, value stocks within the small-cap space might be an interesting play.
The small-cap value funds offer exposure to a wide variety of stocks with value characteristics, such as, low P/B, low P/S and low P/E ratios, which reduce the risk quotient in a security (read: Profit from Small Caps with These Value ETFs).
Given the benefits, a look at this top-ranked, small-cap value ETF could be a good way to target the best of this segment. One way to find a top ranked ETF in the small-cap value space is by using the Zacks ETF Ranking system.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely, Low, Medium, or High.
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, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see: all the Top Ranked ETFs).
For investors seeking to apply this methodology to their portfolio, we have taken a closer look below at a Top Ranked ETF in the small-cap value space, the SPDR S&P 600 Small Cap Value ETF (SLYV).
SPDR S&P 600 Small Cap Value ETF (SLYV - ETF report)
Launched in September 2000, this ETF offers exposure to the small-cap value sector of the U.S. equity market, by tracking the S&P SmallCap 600 Value Index. Holding 449 stocks in its basket, the fund is spread well across individual stocks. None of the individual securities comprise more than 1% of total assets.
Centene Corporation (0.93%), Prospect Capital Corporation (0.92%) and ProAssurance Corporation (0.85%) are the top three holdings of the fund.
In terms of sector allocations, the top four sectors, namely, Financials (22.56%), Industrials (17.04%), Technology (15.25%) and Consumer Discretionary form almost 70% of total fund holdings. At the other end of the scale, Energy, Consumer Staples and Telecoms make up the smallest sectors, combining to account for less than 10% of the assets.
The fund is also relatively cheap in its space, charging investors with just 25 basis points as annual fees. Moreover, the fund has a dividend yield of 1.07%.
SLYV has performed quite well in 2013 adding 33.86%. Thanks in part to this stellar performance and a solid outlook, we currently give SLYV a Zacks ETF Rank of 1 or ‘Strong Buy’ along with a medium risk rating (read: Time for This Top Ranked Industrial ETF).
This means that we are looking for a decent level of outperformance from this product in the next few months, over and above similar funds in the style box world. Thus, if the current trend holds in the market, investors can surely consider adding this top ranked small cap value ETF to their portfolio.
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