Goin’ Small with a Small-Cap ETF

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

One of the most contentious questions in investing is whether small-cap stocks or large-cap stocks are a better investment to secure your financial future.

Adherents of the large-cap-stocks-are-better theory point to research by JennisonDryden, indicating that investors are quicker to flee small-cap stocks for more stable large-cap stocks at the first sign of economic trouble. There does appear to be empirical support for this position in the current market.

According to Royce Investment Partners, during 3Q22 as a whole, the Russell 2000 Index was down 2.2%, with a large part of the decline due to the index’s 17.5% loss from the Aug. 15 to Sept. 30 time period. On an international level, the MSCI ACWI ex USA Small Cap Index declined by 8.4% in 3Q22.

That doesn’t mean, however, that we should throw small-cap stocks out with the proverbial bathwater. At the same time, the same report by JennisonDyrden mentions that small-cap stocks are often the first to bounce back during an economic recovery. This is at least partially because small-cap companies can shift physical and economic resources more rapidly than a large corporation and thus react more quickly to economic changes.

One way to generate profits from small-cap stocks is through the exchange-traded fund (ETF) Invesco S&P SmallCap 600 Revenue ETF (NYSEARCA: RWJ).

RWJ invests in securities that make up the S&P SmallCap 600. Then, unlike many of its fellow small-cap ETFs, RWJ sets up its portfolio by looking at each stock’s fundamentals and then weighting them by top-line revenue. This difference from its competitors is likely due to the S&P SmallCap 600 already screening its stocks for size, liquidity and financial viability. The index then weights its securities by revenue, with higher revenues leading to a heavier weight.

This ETF’s top holdings include World Fuel Services Corporation (NYSE: INT), United Natural Foods, Inc. (NYSE: UNFI), Group 1 Automotive, Inc. (NYSE: GPI), Andersons, Inc. (NASDAQ: ANDE), Sonic Automotive, Inc. Class A (NYSE: SAH), Asbury Automotive Group, Inc. (NYSE: ABG), Community Health Systems, Inc. (NYSE: CYH) and Insight Enterprises, Inc. (NASDAQ: NSIT).

As of Dec. 6, RWJ rose 3.26% in the past month and 7.28% for the past three months. It is currently down 8.03% year to date. 

Chart courtesy of www.stockcharts.com

The fund has amassed $970.84 million in assets under management and has an expense ratio of 0.39%.

While RWJ does provide an investor with a way to invest in small-cap stocks, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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