Exchange Traded Funds (ETFs)

ETF Talk: A Growing Opportunity for Small-Caps

For the past two weeks, we’ve been discussing exchange-traded funds (ETFs) that focus exclusively on small-cap stocks. While high interest rates have caused small caps to underperform as of late, the likelihood of the Fed lowering interest rates later this year, combined with small caps selling cheaply on a price-to-earnings (P/E) basis, means that small caps could have a lot to gain.

This rings especially true for growth stocks, as these are stocks that are already generating earnings far faster than their peers. When combined with a small-cap sector that’s poised for growth, it creates a potentially golden investment opportunity. And possibly no ETF capitalizes on it better than the iShares Morningstar Small-Cap Growth ETF (ISCG).

Opened in 2004 by BlackRock, Inc., ISCG tracks a market-cap-weighted index of U.S.-based small-cap growth stocks. ISCG’s index divides the market into three parts — growth, blend and value — and assigns roughly one-third of the market to each. Stocks are classified as “growth” companies based on earnings, cash flow and other valuation metrics. The fund then selects companies from the “growth” assignment that have market capitalization from 90-99.5% for its portfolio.

ISCG’s top 10 holdings are MicroStrategy Incorporated Class A (MSTR), Natera, Inc. (NTRA), Shockwave Medical Inc. (SWAV), Advanced Drainage Systems, Inc. (WMS), Sarepta Therapeutics, Inc. (SRPT), Tetra Tech, Inc. (TTEK), Texas Roadhouse, Inc. (TXRH), Comfort Systems USA, Inc. (FIX), Onto Innovation, Inc. (ONTO) and Wingstop, Inc. (WING). All its holdings are U.S. stocks.

Currently, the fund has an expense ratio of 0.06%, and roughly $559 million in assets under management. The fund has a wide variety of holdings across various industries, including finance, technology, manufacturing and consumer and industrial services.

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As of May 20, the trust is up 7.67% in the past month, 4.03% in the past three months and 5.04% year to date.

However, while ISCG has potential, it might not be the gold mine that’s right for you. You should always consider your investment goals and do your due diligence before adding any stock or exchange-traded fund to your portfolio.

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

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.