Small-caps can still provide the growth-fueled formula that helped to accelerate the decade-long bull run before the Covid-19 pandemic. Yet with a lot of market uncertainty still lingering with the pandemic and a forthcoming U.S. presidential election, advisors should keep an eye out for quality funds.
One fund to consider is the Invesco PureBeta MSCI USA Small Cap ETF (PBSM). The fund seeks to track the investment results of the MSCI USA Small Cap Index, which is designed to measure the performance of the small-capitalization segment of the U.S. equity market.
Why go with small-caps now amid all this market uncertainty?
“In Monday’s blustery sell-off, the Dow and S&P 500 fell below an important trend indicator – but not the small cap Russell 2000,” a CNBC article said. “That gives more heft to the belief of some technical strategists that small caps are signaling a broadening of market participation that should help take the entire stock market higher.”
The article also mentioned that major indexes like the S&P, Nasdaq and Dow fell below their 50-day moving averages. However, a major small-cap performance indicator known as the Russell 2000 went above its 50-day, which could portend to strength.
“The point is no damage was done on this pullback, and we think the recovery story is in play. We’re expecting a broad market breakout. We expect participation to continue to broaden. Our broader theme is cyclical and beta and small caps have that,” said Ari Wald, technical analyst at Oppenheimer.
More Small-Cap Options
Another fund to consider for small-cap exposure is the Invesco S&P SmallCap Quality ETF (XSHQ). XSHQ seeks to track the investment results of the S&P SmallCap 600® Quality Index.
The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index. S&P DJI weights each component stock of the underlying index by the total of its quality score multiplied by its market capitalization; stocks with higher scores receive relatively greater weights.
Want something more strategic? Give the Invesco Russell 2000 Dynamic Multifactor ETF (OMFS) a look—the index is constructed using a rules-based approach that re-weights small-cap securities of the Russell 2000 Index according to economic cycles and market conditions, reflected by expansion, slowdown, contraction or recovery.
The securities are assigned a multi-factor score from one of five investment styles: value, momentum, quality, low volatility and size. The Fund and Index are reconstituted and rebalanced based on economic indicator signal changes, as frequently as monthly.