Fear Volatility In Small Caps? Try These Low Volatility ETFs

Includes: SMLV, XSLV
by: Zacks Funds

Following the Fed chief Janet Yellen's positive rhetoric on the health of the U.S. economy, investors regained confidence in the U.S. market. They seem to have cast aside worries that arose from the shockingly downbeat job data for the month of May and are paying more attention to other upbeat corners of the economy.

After all, other economic indicators have lately been stronger. As per the Institute for Supply Management (ISM), the manufacturing PMI was 51.3 in May, up from 50.8 recorded in April.

Overall retail sales expanded 1.3% in April from March, representing the largest gain since March 2015. New U.S. single-family home sales logged the biggest leap in 24 years in April while existing home sales for April hit a three-month high.

What About Rate Hike?

As of now, chances of a rate hike in June seem very low with most bets shifted back to July. Goldman Sachs now sees 40% chance of a rate hike in July. This is almost double the chance that the bond market is anticipating. So the greenback is unlikely to lose much strength in the coming days. However, Yellen didn't provide any specific timeline for the next rate hike.

Are Small Caps the Best Bet?

Since small cap stocks are more closely tied to the domestic economy, the recent optimism around U.S. growth momentum bode well for this capitalization. It keeps investors away from the ongoing global growth issues.

Moreover, by deriving most of the earnings from the homeland, small-caps have negligible exposure in foreign shores and are thus unscathed by the impending strength in the greenback. All these developments pull things together for small-cap investing.

What About Volatility?

This capitalization is highly volatile in nature. These stocks trade with lesser volumes and the companies lack economies of scale and are less familiar with the investors. All in all, many fear an erratic behavior by the small-cap stocks.

Moreover, if the Fed acts in the near term, volatility will also flare up in the broader market. All these make a look at small-cap low volatility ETFs an enticing option.

SPDR Russell 2000 Low Volatility ETF (NYSEARCA:SMLV)

The fund delivers exposure to low volatility by investing in small cap equity securities. To do so, the fund tracks the Russell 2000 Low Volatility Index. The 167-stock fund puts over half of the basket in the financial services sector and about 11% in producer durables' stocks. No stock accounts for more than 2.04% of the fund. The fund charges 12 bps in fees.

PowerShares S&P SmallCap Low Volatility ETF (NYSEARCA:XSLV)

The fund looks to track the S&P SmallCap 600 Low Volatility Index. The $410.3 million fund holds about 119 stocks. No stock accounts for over 1.3% of the fund. Financials is the top sector with about 53.5% exposure followed by 15.4% in Industrials and 9.1% in Utilities.

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