Small caps have been surging higher as of late, and are considered by many to be the new leaders of the market. This is especially apparent when investors compare the returns of the S&P 500 to the Russell 2000 over the past few months.
In the trailing three month period, the Russell 2000 has outperformed its large cap-focused counterpart by roughly 400 basis points and it has actually gained more than 10% in the time frame. The bulk of these gains have also come to start 2013, suggesting that with the lack of the fiscal cliff, investors piled into higher beta products to begin the new year.
Given this, it may be time for investors to look to include a greater allocation to small caps in their portfolio. This may be especially true if mega caps like Apple (AAPL) continue to struggle and drag down their respective large cap-centric indexes and sectors (read Small Cap Value ETF Investing 101).
This development could still have some legs so investors may want to take advantage of these trends in basket form. However, there are plenty of choices in the ETF world for this slice of the market, so it may be best to narrow down the choices using the Zacks ETF Rank.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (also see Zacks Top Ranked Small Cap ETF: SCHA).
For investors seeking to apply this methodology to their portfolio with style boxes, we have taken a closer look at a Top Ranked ETF in the small cap space, the Vanguard Small-Cap Value ETF (VBR).
VBR in Focus
This ETF holds about 1,000 securities in its portfolio, tracking the MSCI US Small Cap Value Index. The benchmark offers up a focus on lower risk, low volatility stocks that have value characteristics, but are still firms that have a small-capitalization level.
The resulting portfolio is heavily skewed towards financials, with industrials and technology stocks rounding out the top three. At the other end of the scale, telecoms, consumer staples, and energy make up the smallest sectors, combining to account for less than 10% of the assets.
In terms of individual companies, BRE Properties (BRE), American Capital (ACAS), and RPM International (RPM), are the top three holdings, as of the end of 2012. However, the fund does do a great job of spreading out assets as the top ten accounts for just under 4.4% of assets combined (also read Three Small Cap ETFs with Impressive Yields).
VBR is also a cheap choice in the space, charging investors just 21 basis points a year in fees. This is particularly good when investors consider the robust 2.4% SEC yield that the product is currently sporting, a sizable payout even after fees are subtracted.
In addition to this impressive yield, this small cap ETF has been performing quite well as of late, having actually outperformed the broad Russell 2000 in the year-to-date look. Thanks in part to this stellar performance and solid outlook, we currently give VBR a Zacks ETF Rank of 1 or ‘Strong Buy’ along with a low risk rating (also see Time to Consider Pure Growth and Value ETFs?).
This means that we are looking for a decent level of outperformance for this product over the next few months, over and above similar funds in the style box world. If current trends hold in the market, this could definitely be true, suggesting that for a lower risk value play in pint sized securities investors should consider this top Ranked ETF for their portfolios.
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