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"While many investors are wondering whether it’s safe to start buying those mega-size companies that led the last bull market, it’s actually small-cap stocks that may be the biggest bargains."
"For smaller-company stocks, price/earnings ratios—a widely used measure for determining the value of a stock relative to its earnings—have reached their lowest levels in two decades. Lower ratios generally represent more attractive values and with a greater potential for price gains."
Barron's current issue also has a feature article about small-cap bargains which I can't access online. Whaddya know, my small-cap fund (VTMSX) became an even bigger bargain today!
"Small-caps outperformed during recessions in the 1970s and early 1980s, when the Federal Reserve was fighting high inflation, as it is now. The group has higher proportional exposure than large-caps to inflation beneficiaries, like energy. It’s also more domestic and more tied to capital spending, which is a plus if U.S.-based manufacturers continue moving factories home. But small companies generally have less financial flexibility than large ones, which is a negative if borrowing rates stay elevated.
One way for investors to add small- cap exposure is with a low-fee index fund like the iShares Russell 2000IWM –2.75% exchange-traded fund (ticker: IWM). Then again, switching indexes might be an upgrade. The S&P SmallCap 600SP600EQ –2.60% index has outperformed the Russell 2000 index by more than a percentage point a year over the past five, 10, and 20 years, and has generally been less volatile. The biggest reason: S&P uses a profitability screen to admit index members. SPDR S&P 600 Small CapSLY –2.81% ETF (SLY) is one fund option there.
If a profitability screen helps, how about a value tilt? The aforementioned indexes weight small-caps by market cap. Asset manager Research Affiliates has an index that weights them by fundamental measures of value like sales, cash flow, and dividends. Investors can buy in through Schwab Fundamental U.S. Small Company Index ETF (FNDA). It’s more expensive than the other funds, but still cheap, with yearly expenses of 0.25%. Since inception in 2013, the fund has returned 7.4% a year, beating the Russell 2000 by nearly a point through Sept. 30."
"For actively managed funds that are open to new money, Columbia Small Cap Value II (NSVAX) and Wasatch Core Growth (WGROX) get high marks from Morningstar. Each costs a little more than 1% a year and has beaten its category by about a point a year over the past decade."
IWM based on R2000 is not a good SC index. Almost 1/3 rd of its companies have no earnings. Russell also has a bad annual rebalancing policy for all of its indexes - the date is preannounced and all is done on a single day, so there is lot of front-running ahead of Russell rebalancing. So, why do mutual funds benchmark to R2000? It is an easier bogey to beat; some also say that is the total SC market and it is what it is..
IWM based on R2000 is not a good SC index. Almost 1/3 rd of its companies have no earnings. Russell also has a bad annual rebalancing policy for all of its indexes - the date is preannounced and all is done on a single day, so there is lot of front-running ahead of Russell rebalancing. So, why do mutual funds benchmark to R2000? It is an easier bogey to beat; some also say that is the total SC market and it is what it is..
Better SC ETFs are IJR, SCHA, SLY, VIOO, etc.
I agree with yogibearbull on the Russell 2000. The S&P 600 is a better small-cap index.
Each recession is different. In 2008’s drawdown, all funds went down considerably. In 2000-2002 tech bubble, there were some funds that survived. Value funds in particular smaller caps outshined the growth counterparts by a sizable margins. Back then Fidelity low priced stock fund, FLPSX, a mid-cap value fund did well for two years, then it lost 6% in 2002. Considering other funds were down in excess of 50% in that 3 years period, FLPSX did well. Fast forward 20 year, FLPSX is quite different with larger names, large oversea exposure, large asset base, and managed by a team of managers. Joel Tillinghast is retiring in 2023. https://finance.yahoo.com/quote/FLPSX/performance?p=FLPSX
How will small caps perform next year? No one really know for sure and that ought to depend on how severe the recession will be.
I am happy with RWJ, which revenue weights the S&P SC 600. I have had it in my IRA since March 2021. It will replace a cap-weighted 600 in my taxable account in the next six months or so.
For some reason not apparent to me, the revenue weighting pushes it into the value box.
No asset classes did well such as 2008’s drawdown.
Today situation is complicated from having strong employment and high consumer spending while there are signs of slowing manufacturing. Housing sector is doing the worst so far. There has been much discussion on the severity or even soft landing.
IWM based on R2000 is not a good SC index. Almost 1/3 rd of its companies have no earnings. Russell also has a bad annual rebalancing policy for all of its indexes - the date is preannounced and all is done on a single day, so there is lot of front-running ahead of Russell rebalancing. So, why do mutual funds benchmark to R2000? It is an easier bogey to beat; some also say that is the total SC market and it is what it is..
Better SC ETFs are IJR, SCHA, SLY, VIOO, etc.
I agree with yogibearbull on the Russell 2000. The S&P 600 is a better small-cap index.
I know I’ve searched this before, and had a tough-ish time finding something actionable; does anyone know index mutual funds based upon the S&P 600?
we're not going to avoid some kind of recession. It seems to me we are dealing with the overhang of exceedingly, ridiculously stupid oversupply of money-printing by the gummint through the covid. Just way "beyond the beyond." Workers certainly deserve their raise. Yet labor force participation is down. The worker-pool is shrinking. Ostensibly, employers will need to pay workers more money. Are we at "stagflation" yet? Looks like it to me. Higher rates will reduce lending and other demand-side activity. But SERVICE-sector wages are going to be sticky---- even though such workers certainly deserve a LIVING wage. With more money in hand, people have more choices, options. Trouble is, too many people are "money-stoopid."
You may want to consider VTMSX in taxable accounts. Not a truly passive fund because it's managed with tax efficiency in mind. The fund's principal investment strategy is listed below.
"The Fund purchases stocks included in the S&P SmallCap 600 Index—an index that is made up of stocks of smaller U.S. companies—in approximately the same proportions as in the Index. To improve tax efficiency, the Fund may limit investments in Index securities that have undesirable tax characteristics and may continue to hold securities no longer included in the Index."
In addition to VIOO mentioned above, iShares Core S&P Small-Cap ETF (IJR) is also an option.
I have been quite happy with OUSM a small cap quality dividend ETF which is similar to VDIGX in its philosophy. Volatility is also muted compared to the indexes.
@WABC: RWJ is a good pick. I am impressed that the Invesco methodology appears to work equally well for large cap (RWL) and mid cap (RWK).
I have been a fan of the Pacer Funds Cash Cows method, and I have made a commitment to COWZ. Historically this ETF has been slotted in MCV, but its portfolio now is decidedly LCV. Curiously, the Pacer SC fund (CALF) is nowhere near as successful as RWJ or AVUV or BRSVX, the SCV funds I follow, even though it follows a seemingly winning formula. I think Mebane Faber at Cambria funds has a fine method called Shareholder Yield, but only one of his funds (SYLD) can be called outstanding. It, too, has morphed into a LCV after a history of holding SMID stocks. His foreign and emerging market shareholder yield funds have middling records.
@BenWP Bought SYLD in March 2021 for my IRA. At the time I think Apple was a constituent. So there is some variation in what some of these funds hold. I'm comfortable with that since I think I understand their theses.
Bought FYLD and IHDG for the foreign dividend sleeve of my taxable account. Everybody says you're supposed to have some foreign. Their standards seem like reasonable hurdles.
@WABC: I just bought some SYLD after selling some MOAT. Foreign stocks were really cheap late Sept when I bought FNDF in hopes of a rebound, which occurred. Took some good profits and hope to repeat. These days, I’m trying to be less greedy and more satisfied with modest gains. Added to BRSVX.
Comments
Whaddya know, my small-cap fund (VTMSX) became an even bigger bargain today!
"Small-caps outperformed during recessions in the 1970s and early 1980s, when the Federal Reserve was fighting high inflation, as it is now. The group has higher proportional exposure than large-caps to inflation beneficiaries, like energy. It’s also more domestic and more tied to capital spending, which is a plus if U.S.-based manufacturers continue moving factories home. But small companies generally have less financial flexibility than large ones, which is a negative if borrowing rates stay elevated.
One way for investors to add small- cap exposure is with a low-fee index fund like the iShares Russell 2000IWM –2.75% exchange-traded fund (ticker: IWM). Then again, switching indexes might be an upgrade. The S&P SmallCap 600SP600EQ –2.60% index has outperformed the Russell 2000 index by more than a percentage point a year over the past five, 10, and 20 years, and has generally been less volatile. The biggest reason: S&P uses a profitability screen to admit index members. SPDR S&P 600 Small CapSLY –2.81% ETF (SLY) is one fund option there.
If a profitability screen helps, how about a value tilt? The aforementioned indexes weight small-caps by market cap. Asset manager Research Affiliates has an index that weights them by fundamental measures of value like sales, cash flow, and dividends. Investors can buy in through Schwab Fundamental U.S. Small Company Index ETF (FNDA). It’s more expensive than the other funds, but still cheap, with yearly expenses of 0.25%. Since inception in 2013, the fund has returned 7.4% a year, beating the Russell 2000 by nearly a point through Sept. 30."
"For actively managed funds that are open to new money, Columbia Small Cap Value II (NSVAX) and Wasatch Core Growth (WGROX) get high marks from Morningstar. Each costs a little more than 1% a year and has beaten its category by about a point a year over the past decade."
Small cap extremely cheap
Maybe coil sideways or more upswings next few months waiting Feds direction
We been trading buy more IWM /buy more IWM recently, rsi not bad mid 50s, macd holding stable Perhaps more uptrends
We also trade weekly TNA put sales 15% strike prices lowered Delta, collect small premiums
Better SC ETFs are IJR, SCHA, SLY, VIOO, etc.
I agree with yogibearbull on the Russell 2000.
The S&P 600 is a better small-cap index.
https://finance.yahoo.com/quote/FLPSX/performance?p=FLPSX
How will small caps perform next year? No one really know for sure and that ought to depend on how severe the recession will be.
For some reason not apparent to me, the revenue weighting pushes it into the value box.
Small-caps generally don't do well in severe recessions.
Today situation is complicated from having strong employment and high consumer spending while there are signs of slowing manufacturing. Housing sector is doing the worst so far. There has been much discussion on the severity or even soft landing.
Bring on those higher-rate CDs.
I agree.
You may want to consider VTMSX in taxable accounts.
Not a truly passive fund because it's managed with tax efficiency in mind.
The fund's principal investment strategy is listed below.
"The Fund purchases stocks included in the S&P SmallCap 600 Index—an index that is made up of stocks of smaller U.S. companies—in approximately the same proportions as in the Index.
To improve tax efficiency, the Fund may limit investments in Index securities that have undesirable tax characteristics and may continue to hold securities no longer included in the Index."
In addition to VIOO mentioned above, iShares Core S&P Small-Cap ETF (IJR) is also an option.
I have been a fan of the Pacer Funds Cash Cows method, and I have made a commitment to COWZ. Historically this ETF has been slotted in MCV, but its portfolio now is decidedly LCV. Curiously, the Pacer SC fund (CALF) is nowhere near as successful as RWJ or AVUV or BRSVX, the SCV funds I follow, even though it follows a seemingly winning formula. I think Mebane Faber at Cambria funds has a fine method called Shareholder Yield, but only one of his funds (SYLD) can be called outstanding. It, too, has morphed into a LCV after a history of holding SMID stocks. His foreign and emerging market shareholder yield funds have middling records.
Bought FYLD and IHDG for the foreign dividend sleeve of my taxable account. Everybody says you're supposed to have some foreign. Their standards seem like reasonable hurdles.