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Small-caps have gone through the roof this year, clearly outperforming its larger counterparts. Small-cap fund iShares Russell 2000 ETF (IWM - Free Report) is up 9.5% while the S&P 500-based fund SPY is up about 4.1% this year (as of Jul 22, 2018).
President Trump’s protectionist agenda and the resultant trade war fears started weighing on large-cap stocks that have considerable international exposure. And the domestically focused pint-sized stocks soared.
In additions to trade tensions, there were some other factors that played their roles in pushing the pint-sized stocks higher. The U.S. economy has been on steady ground. This has given a boost to small-cap equities. Apart from this, upbeat earnings sent small caps rallying in recent times. The tax reform is yet another tailwind to the segment as it is supposed to favor small-caps more than their larger peers.
Are Small-Cap Valuations Rich Now?
After a nagging four-month long U.S.-Sino trade war negotiation, the move or the first enactment in July seems very much priced in at the current level. Large caps are now slowly coming at the forefront. SPDR S&P 500 ETF (SPY - Free Report) has taken an upper hand over the small-cap fund IWM as well as Vanguard S&P Small-Cap 600 ETF (VIOO - Free Report) (read: Trade Fear Oversold? Large-Cap Growth ETFs at 52-Week High).
Mayflower Advisors' Larry Glazer recently cautioned that numerous investors are embracing pain by paying an "absurd and ridiculous premium" for small-cap stocks, as quoted on CNBC. The strategist believes the trade war will likely dissolve before the midterm elections, and trigger a sudden, "massive rotation" in the market. This may lead to losses for many investors, who are betting blindly on smaller stocks (read: Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).
Why Look for Value?
With all these overvaluation concerns doing rounds, looking for value ETFs in the small-cap spectrum seems intriguing. The value segment tends to remain relatively stable in an uncertain environment. Value funds offer exposure to a wide variety of stocks with value characteristics, such as low P/B, low P/S and low P/E ratios.
For investors, we present four value ETFs that have P/E ratios least in the small-cap ETFs space. P/E ratios are less than that of IWM.
First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) – P/E 10.68x
The fund tracks the NASDAQ AlphaDEX Small Cap Value Index. Industrials (24.9%), Consumer Discretionary (17.78%), Financials (16.25%) and Energy (10.81%) take the top four spots in the sectoral allocation. The fund charges 70 bps in fees.
iShares Morningstar Small-Cap Value ETF – P/E 13.86x
The underling Morningstar Small Value Index measures the performance of stocks issued by small-capitalization companies. Financials (26.2%), Consumer Discretionary (14.67%) and Real Estate (11.57%) make up the top three sectors of the fund. The expense ratio of the fund is 0.30%.
SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) – P/E 16.26x
The underlying S&P SmallCap 600 Value Index measures the performance of the small-capitalization value sector in the U.S. equity market. Financials (20.19%), Industrials (17.5%) and Consumer Discretionary (16.1%) are the top three holdings of the fund. It charges 15 bps in fees.
Vanguard Russell 2000 Value ETF (VTWV - Free Report) – P/E 17.20x
The fund follows the Russell 2000 Value Index. Financial Services (40.5%), Consumer Discretionary (11.9%) and Producer Durables (11.2%) form the top three sectors of the fund. It charges 20 bps in fees.
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Time to Look for Value in Small-Cap ETFs?
Small-caps have gone through the roof this year, clearly outperforming its larger counterparts. Small-cap fund iShares Russell 2000 ETF (IWM - Free Report) is up 9.5% while the S&P 500-based fund SPY is up about 4.1% this year (as of Jul 22, 2018).
President Trump’s protectionist agenda and the resultant trade war fears started weighing on large-cap stocks that have considerable international exposure. And the domestically focused pint-sized stocks soared.
In additions to trade tensions, there were some other factors that played their roles in pushing the pint-sized stocks higher. The U.S. economy has been on steady ground. This has given a boost to small-cap equities. Apart from this, upbeat earnings sent small caps rallying in recent times. The tax reform is yet another tailwind to the segment as it is supposed to favor small-caps more than their larger peers.
Are Small-Cap Valuations Rich Now?
After a nagging four-month long U.S.-Sino trade war negotiation, the move or the first enactment in July seems very much priced in at the current level. Large caps are now slowly coming at the forefront. SPDR S&P 500 ETF (SPY - Free Report) has taken an upper hand over the small-cap fund IWM as well as Vanguard S&P Small-Cap 600 ETF (VIOO - Free Report) (read: Trade Fear Oversold? Large-Cap Growth ETFs at 52-Week High).
Mayflower Advisors' Larry Glazer recently cautioned that numerous investors are embracing pain by paying an "absurd and ridiculous premium" for small-cap stocks, as quoted on CNBC. The strategist believes the trade war will likely dissolve before the midterm elections, and trigger a sudden, "massive rotation" in the market. This may lead to losses for many investors, who are betting blindly on smaller stocks (read: Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).
Why Look for Value?
With all these overvaluation concerns doing rounds, looking for value ETFs in the small-cap spectrum seems intriguing. The value segment tends to remain relatively stable in an uncertain environment. Value funds offer exposure to a wide variety of stocks with value characteristics, such as low P/B, low P/S and low P/E ratios.
For investors, we present four value ETFs that have P/E ratios least in the small-cap ETFs space. P/E ratios are less than that of IWM.
First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) – P/E 10.68x
The fund tracks the NASDAQ AlphaDEX Small Cap Value Index. Industrials (24.9%), Consumer Discretionary (17.78%), Financials (16.25%) and Energy (10.81%) take the top four spots in the sectoral allocation. The fund charges 70 bps in fees.
iShares Morningstar Small-Cap Value ETF – P/E 13.86x
The underling Morningstar Small Value Index measures the performance of stocks issued by small-capitalization companies. Financials (26.2%), Consumer Discretionary (14.67%) and Real Estate (11.57%) make up the top three sectors of the fund. The expense ratio of the fund is 0.30%.
SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) – P/E 16.26x
The underlying S&P SmallCap 600 Value Index measures the performance of the small-capitalization value sector in the U.S. equity market. Financials (20.19%), Industrials (17.5%) and Consumer Discretionary (16.1%) are the top three holdings of the fund. It charges 15 bps in fees.
Vanguard Russell 2000 Value ETF (VTWV - Free Report) – P/E 17.20x
The fund follows the Russell 2000 Value Index. Financial Services (40.5%), Consumer Discretionary (11.9%) and Producer Durables (11.2%) form the top three sectors of the fund. It charges 20 bps in fees.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>