Exchange Traded Funds (ETFs)

Goin’ Small with a Small-Cap ETF

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.

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 Intelligence Report, Investing Edge, 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.