By Bruce K. Aronow and James MacGregor
It’s an opportunity born of neglect. Small-cap stocks have historically been the star performers of equities, handily outpacing large-cap stocks. And because they can get lost so easily in the grand sweep of the markets, small companies are often misunderstood and mispriced. That makes them great sources of alpha potential, especially for investors who take the time to get to know them well.
By expanding the playing field, active SMID-cap investing, which unites the faster growth of small-cap companies with the higher quality of midsize firms, offers the robust return potential of small stocks, but with less volatility and fewer of the constraints associated with small-cap-only strategies.
Like their smaller peers, SMID-caps aren’t as well followed or understood as big stocks. The typical stock in the Russell 2500 Index (the most widely used proxy for the SMID-cap category) is covered by only eight
Picking from the multitude of style ETFs is a daunting task. There are as many as 37 in any given style and at least 214 ETFs across all styles.
Why are there so many ETFs? The answer is: because ETF providers are making lots of money selling them. The number of ETFs has little to do with serving investors' best interests. Below are three red flags investors can use to avoid the worst ETFs:
I address these red flags in order of difficulty. Advice on How to Find the Best Style ETFs is here.
How To Avoid ETFs with Inadequate Liquidity
This is the easiest issue to avoid and my advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value
Our goal in this profile is to help investors wade through the many competing ETF offerings available. There are currently over 50 U.S. small-cap issues whether categorized as growth, value or blend. This is overwhelming for most investors. We try to help select those ETFs that matter even if they might be repetitive. The result is a more manageable list of issues from which to choose varying ETFs, perhaps by fees and history.
Our focus is to stick with the "blend" category since they should satisfy most investor needs. We believe these constitute the best index-based offerings individuals and financial advisors may utilize.
Uniquely, investors should remember: Small-cap issues usually carry higher beta (volatility or higher risk levels) than their large cap peers. This means during times of higher economic growth combined with accommodative Fed monetary policies returns in this sector should outperform larger cap issues. But, the opposite situation