Though equity markets have seemingly taken a breather in recent months, the overall investment landscape so far in 2013 has been a positive one. And with investors slowly making their way back to riskier corners of the market, certain investment strategies have managed to deliver stellar returns. One such winning strategy has been investments in small capitalization equities [see Visual Guide: Major Index Returns By Year].
The investment thesis behind small-caps is a rather simple one: these companies typically exhibit favorable return profiles relative to their large cap counterparts because of their higher growth potentials. Investors should note, however that these firms come with higher levels of risk and volatility.
But for those who believe the additional risks are worth it, we highlight the five top performing small-cap ETFs so far in 2013 (data as of 8/21/2013):
1. S&P SmallCap Health Care Portfolio (PSCH, B+), Up 33%
This Invesco PowerShares offering is designed to offer exposure to the healthcare industry, focusing on small cap companies that are involved in biotechnology, pharmaceuticals, medical technology and supplies, and facilities. The fund holds a portfolio of a little under 67 individual securities, a third of which are healthcare equipment and supplies companies. Year-to-date, the fund is up more than 33% [see also Want A Simple, 3-ETF Portfolio? Here Are 25 Of Them].
2. DWA SmallCap Technical Leaders Portfolio (DWAS, C+), Up 32%
This fund applies a unique selection methodology to a universe of approximately 2,000 U.S.-listed small-cap companies. The resulting portfolio consists of approximately 300 stocks that demonstrate powerful relative strength characteristics. DWAS is well-balanced, with each individual security given no more than a 2.0% weighting. In terms of sector breakdown, the fund is slightly biased towards consumer cyclical equities, though it does offer meaningful exposure to healthcare, industrials, financial services, and technology equities. So far in 2013, the fund is up more than 32%.
3. S&P SmallCap Information Technology Portfolio (PSCT, A-), Up 25%
Yet another PowerShares offering, this fund offers investors a way to make a small cap play on the information technology sector. PSCT’s portfolio is comprised of a little under 130 individual securities, the majority of which are electronic equipment and semiconductor producers. The fund also features a meaningful allocation to micro cap companies, which make up nearly 40% of total assets. Year-to-date, PSCT has gained nearly 25% [see 3-Year Review: Best & Worst ETFs In Each Sector].
4. SmallCap Earnings Fund (EES, C+), Up 25%
This WisdomTree ETF gives a unique twist on the small cap space, as its underlying index targets small cap stocks that have reported positive cumulative earnings over the past four quarters. The index is earnings weighted, meaning that the companies with the largest reported earnings get the biggest allocation. Compared to the other funds on this list, EES’s portfolio is significantly bigger with more than 900 individual holdings. Investors should note, however, that the majority of the fund’s assets are allocated towards micro cap firms.
5. Russell 2000 Growth ETF (IWO, A-), Up 24%
This popular iShares fund is designed to track the performance of the small capitalization growth sector of the U.S. equity market. IWO’s portfolio consists of roughly 1100 individual securities, which span across a wide array of industries. Nearly 20% of the fund’s total assets are allocated to tech firms, though industrials, healthcare, and consumer cyclicals equities also receive meaningful allocations. Year-to-date, this fund is up nearly 24% [see Small Cap ETFdb Portfolio].
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Disclosure: No positions at time of writing.