Noting VettaFi’s ongoing advisor surveys, Lydon said, “We asked advisors which asset class do you feel will be the best performing asset class year to date.” He continued, “hands down the winner was U.S. Small Cap.”
VBK is the largest U.S. small cap growth ETF out there. It has an expense ratio of 7 basis points. “Its really inexpensive, you get a lot for your buying power there.” Lydon expressed that investors who believe in swinging pendulums and reversion to mean in the markets should consider small caps.
Asked by Jaffe how to use this fund, Lydon offered, “when talking to advisors, their allocations to small cap has continued to shrink because small caps have underperformed the S&P 500, for example.” Its hard to make a case to clients to continue diversification into small caps when the clients are wrapped up in comparing it to the broader S&P 500. Large caps with high correlation to the S&P 500 have been in favor for so long that small and mid caps have been overlooked.
The S&P has had a solid year so far, but Lydon shared that VBK has outperformed it year to date by almost twice. With the S&P up 6%, VBK is near 12%. “It has also outperformed the Nasdaq 100,” Lydon added.
Jaffe wondered if it had room to continue going up, given how dramatically it has outperformed. Lydon expressed that its only recently gone above its trendline, creating a possibility for it to continue to improve. “Its not in scary territory where you feel you’d be buying high,” he said, noting the funds value is 22% off prices you would pay for the S&P 500. Investors cautious about making a growth play after value’s strong year should consider that, though the year isn’t all that old, growth is currently outperforming value.
Overall, Lydon offered that VBK might be an interesting opportunity for advisors to explore in the current market environment.
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