Not only have actively managed small-caps outperformed their benchmarks in both January 2022 and over the course of 2021, but small-cap stocks in general are currently experiencing discounted prices despite having the potential to outperform during bull markets. According to a report from Jefferies LLC, 81% of actively managed small-cap strategies beat the Russell 2000, and 94% of active small-cap core strategies beat the benchmark, the highest beat rate since the bank started collecting the data in 1999.
“Alpha generation is alive and well in small-cap,” said Steven G. DeSanctis, an analyst at Jefferies. “When we get higher volatility, that’s when active earns their fees.”
Despite being on average cheaper than large-caps, James Paulsen, chief investment strategist of The Leuthold Group, is quoted in MarketWatch as saying that small-cap earnings are rising faster than the earnings of large-cap companies.
Meanwhile, Michael Corbett, CEO, CIO, and portfolio manager at Perritt Capital Management, predicts that the economy will be strong this year due to various types of embedded stimulus. In a strong economy, smaller companies tend to fare better. For one thing, since smaller companies tend to be leaner, they can raise prices, which boosts margins. For another, they tend to be based in cyclical businesses, which do better when the economy is strong.
Another tailwind helping small-caps is that while consumer confidence is low, Paulsen believes that it’s likely to improve once the Omicron variant fades, inflation eases, and more people find better-paying jobs. As consumer confidence rises, people are more likely to consider riskier investments, like small-caps.
The Nationwide Russell 2000 Risk-Managed Income ETF (NTKI) is an actively managed fund that invests in a portfolio of securities included in the Russell 2000 Index™. The Russell 2000™ tracks approximately 2,000 U.S. small-cap companies.
NTKI utilizes an options collar strategy as well to seek to reduce the volatility of the fund and provide some amount of downside protection. It also generally uses a “replication” strategy when investing in the Russell 2000 but will switch to a “representative sampling” at the discretion of the sub-advisor and when it is believed to be in the fund’s best interest.
NTKI seeks high monthly income levels generated from both the dividends received from equity holdings and premiums from the options collar. The fund offers a tactical investment opportunity for investors seeking large upside growth potential by gaining exposure to small-caps via the Russell 2000.
NTKI has an expense ratio of 0.68%.
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This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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Alpha – Used in finance as a measure of performance, is the excess return of an investment relative to the return of a benchmark index.
Russell 2000® Index: An unmanaged index that seeks to measure the performance of the small-cap segment of the U.S. equity universe.
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