Shift Into Economic Recovery with Small Caps, 'ERSX'

Many companies that had suffered during Covid-19 shutdowns, particularly those in the small cap category, are beginning to rebound, as consumers begin to spend more.

“Smaller companies tend to receive a larger relative benefit from improvements in the economy—their smaller size and more limited geographies tend to make them more sensitive to changes in economic conditions,” said Todd Edwards, an international small cap manager at Cambiar in an interview with Barron’s.

Within the U.S., the small-cap Russell 2000 Index posted three positive quarters of gains in 2020, with an almost record-setting single year return of 94.8%.

Small cap companies are more easily able to adapt to economic changes than their large cap counterparts, and as economies begin to shift into recovery, the natural value of these companies stands to provide great opportunities for growth.

“The transition over the past twelve months from recession to recovery and into expansion is seemingly priced into many small-cap companies,” said International Investment.

But the opportunity isn’t limited to the U.S. A recovering economy is a prime time to invest in international small caps as well.

“For many sectors within the small cap universe, the market appears to be rediscovering the importance of earnings. After a period of subpar economic growth, earnings are just now beginning a robust recovery, with many industries still well shy of pre-Covid levels,” said International Investment.

The opportunity for growth is particularly apparent in international small caps, reports Barron’s. Tracking from the crash in March 2020, the MSCI Europe, Australasia, and Middle East Small-Cap Index has performed better than the MSCI EAFE Index by close to 10%, according to data reported in Barron’s.

“The nascent global economic recovery, fueled by re-openings, fiscal and monetary stimulus, and pent-up consumer demand is in turn spurring the revitalization of value and cyclicals within small cap,” International Investment added.

The ERShares NextGen Entrepreneurs ETF (ERSX) utilizes the Entrepreneurial Factor© (EF) to identify primarily non-U.S. small cap entrepreneurial companies. The EF was created using research and AI to identify investment opportunities through the unique lens of entrepreneurial leadership and the growth factors that are attributed to entrepreneurs specifically.

ERSX follows a global investment model that, in addition to gains from small cap companies, also captures returns from currency fluctuations, comparative trade imbalances, and supply and demand strengths.

ERSX has a gross expense ratio of 0.75% and has global exposures to the following sectors: information technology (27%), consumer discretionary (26%), communication services (18%), healthcare (16%), as well as several smaller allocations.

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