Has the time come to invest in small caps? Small-cap firms are pretty cheap on a historical basis, with the Russell 2000’s forward p/e ratio 20% below its 10-year average. That may set up an intriguing opportunity for investors to look at smaller firms that could be primed for fast growth. With rising rates a notable challenge, an approach that emphasizes quality small caps may hold a particular appeal.
Why look to small caps? Their affordability relative to their historical average makes now a solid time to adjust small-cap allocations. For those investors who may not already have small-cap holdings, or are simply unsatisfied with those holdings, now could be the time to revisit their small-cap strategies.
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That said, small caps are facing a tough time at the current moment per the below graph from WisdomTree Investments. The rising cost of servicing debt for the smaller caps may see the best among them rise to the top. The right ETF could identify those firms that meet a quality, growth threshold
Eyeing a Quality Small-Caps ETF
That scenario speaks to the case for an ETF like the WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS ). The quality small-caps ETF considers the small-cap universe, and tracks a dividend-weighted index of U.S. small-cap stocks with growth characteristics. DGRS builds a portfolio of 25% of dividend-paying stocks with the lowest capitalization that meet growth and quality standards.
Tracking the WisdomTree U.S. SmallCap Quality Dividend Growth Index, DGRS recently hit its 10-year ETF milestone. The quality small caps ETF charges 38 basis points for its exposures. Small caps’ struggles this year have impacted DGRS, too, yes. However, the ETF has a strong performance track record over the last three years, returning 9.3% in that time. For those investors looking to the long term, the current dip in small-cap costs could make them an intriguing buy-and-hold opportunity.
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