A Timely Factor-Based Small-Cap ETF
This article was originally published on ETFTrends.com.
Investors looking for factor-based small-cap investments have options to consider, including the Xtrackers Russell 2000 Comprehensive Factor ETF (DESC) .
DESC tracks the Russell 2000 Comprehensive Factor Index. That benchmark “is designed to provide transparent, cost-efficient exposure to small-cap domestic equities based on five factors – Quality, Value, Momentum, Low Volatility and Size,” according to DWS .
At a time of strength for small-caps, DESC is delivering with a year-to-date gain north of 8%. DESC;s low volatility exposure is relevant for conservative seeking small-cap exposure because traditional small-cap benchmarks are typically more volatile than large-cap indexes.
Second, the fund's implementation of the value factor is important because small-cap value stocks have been steady at a time when their large-cap counterparts continue to disappoint.
If an investor is looking for a more diversified approach, one could combine all the factors instead of betting on a single approach. An investor would combine value, size, momentum, quality and low volatility. This would result in a portfolio that does well both up and down markets due to the diversified properties.
DESC Perks
Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. Small-cap value has been a winning strategy over the long-term and adding quality and low volatility, among other factors, to that mix as DESC does has the potential to reward investors.
The low-volatility factor, on the other hand, has fallen behind due to concerns over rising rates and the ongoing shift toward growth names. The low-vol factor, though, is now much cheaper on a P/E ratio basis than it was a year ago and relatively cheap when compared to the broader market.
Its mutli-factor approach enables DESC to be a broad-based fund with nearly 1,500 holdings, none of which exceed weights of 0.76%.
While small-caps have outperformed and continued to attract investment interest, some analysts warned that the strong corporate earnings and economic data could conceal tariff’s potential negative impact on small businesses.
DESC's largest sector weight is financial services at nearly 28%. At the small-cap level, financials are mostly domestic plays with little vulnerability to international trade wars.
For more information on factor-based investments, visit our smart beta category.
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