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A Virtuous Avenue To Smaller Stocks

ETF Professor

Over the course of 2019, investors have heard plenty about the proliferation of environmental, social and governance (ESG) strategies in the world of exchange traded funds. More recently, they have been hearing about the resurgence of small-cap stocks. Up almost 3%, the widely followed Russell 2000 Index is on the cusp of a breakout to new highs.

Investors looking to combine the ESG and small-cap themes may want to consider an ETF that does just that: the Nuveen ESG Small-Cap ETF (CBOE: NUSC). NUSC tracks the TIAA ESG USA Small-Cap Index.

That benchmark “uses a rules-based methodology that seeks to provide investment exposure that generally replicates that of small-cap benchmarks through a portfolio of securities that adhere to predetermined ESG, controversial business involvement and low-carbon screening criteria,” according to Nuveen.

Why It's Important

NUSC, at least this year, rebuts the notion that embracing ESG strategies means leaving money on the table. The Nuveen ETF is beating the Russell 2000 and the S&P SmallCap 600 indexes by an average of 260 basis points year-to-date.

“For investors, the question of whether to ride the Russell rally comes down to their opinions on the economy. Buying a small-cap index now is a bullish bet on global growth,” according to Barron's.

Domestic small caps are plays on domestic economic growth, which appears strong right now following the November jobs report and December consumer sentiment numbers out last Friday. The $185.4 million NUSC, which turns three years old this week, is highly cyclical with about a third of its weight devoted to technology and industrial stocks.

The fund's 14.81% weight to financial services names, though seemingly high, is less than the weight to that group in the Russell 2000 and the S&P SmallCap 600 indexes, a relevant point if the Federal Reserves continues lowering interest rates in 2020.

What's Next

Speaking of index comparisons, NUSC holds 651 stocks, so it's better compared to the S&P SmallCap 600 Index. Just 31.3% of the Nuveen ETF's holdings are also found in that index and the overlap by weight between NUSC and the S&P SmallCap 600 is just 21%, positioning the former as an alternative to traditional small-cap strategies.

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