Excited by the prospect of rate cuts boosting smaller firms? Looking forward to the prospect of using small-caps alone to diversify away from large-caps? Think again. Rate cuts may benefit small-caps a small amount, but according to Zacks Investment Management Head of ETFs Sal Esposito, it’s midcaps that will benefit first. That’s why a blended small- and midcap approach could appeal between the first set of cuts and further movement.
Zacks offers the Zacks Small/Mid Cap Core Portfolio ETF (SMIZ ), which celebrated its first anniversary recently. The strategy actively invests in small- and midcap firms leaning on Zacks’ focus on market anomalies. SMIZ looks for earnings estimate revisions, earnings surprise frequency, and accuracy as data points in assessing those firms.
“I think everyone’s been focused on specifically small-caps with … the data showing specifically that small-caps would probably benefit from rate cuts coming,” Esposito said. “We feel that there is going to be a significant boost to small-cap stocks, but we also feel that it’s not going to affect the entire index or asset class.”
Small-Caps, Midcaps, or SMIDcaps?
Zacks offered the SMIZ strategy in separately managed accounts going back to 2009, Esposito said, but launched it as an ETF last year, anticipating rate cuts. Now that they’ve finally hit, it can appeal as the cutting process has begun.
“Our focus has always been, with our research side, ranking stocks based on analysts’ estimate revisions,” Esposito said. “This ETF is really utilizing that principle in the small- and midcap space … there’s way more opportunity in these two asset classes versus the large-cap universe.”
SMIZ chares 56 basis points for its approach. The strategy focuses on four factors. Earnings estimate revisions, as mentioned above, the size of those revisions, how much estimates beat the consensus, and the overall difference between the two. SMIZ has returned 40.9% over the last year, per ETF Database data.
“We feel that by looking at market anomalies and earnings estimate revisions, primarily in the small- and midcap space, that gives a uniquely competitive advantage to kind of outperform the asset classes as a whole, because there’s a lot of companies, if you break it down right, small- and midcap stocks don’t have as many analysts,” he said.
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