Stock selection can be the key to small cap exposure.
Rob Harvey, who is behind the Dimensional US Small Cap ETFuses an actively managed approach to buying the group. He tries to avoid small caps that underperform and drag down the index.
“There’s no reason to hold on to companies that are really at the bottom of the barrel in terms of profitability,” the company’s co-head of product specialists told CNBC’s “ETF Edge” this week. “You remove it from your small cap universe, [and] You can do a lot to increase returns.”
The Russell 2000which tracks small caps, is up more than 12% so far this year. Meanwhile, wider S&P500 is up about 23% in the same time frame.
As of Thursday, the fund’s top holdings were Sprouts farmers market, Abercrombie & Fitch, Fabrinetaccording to the Dimensional Fund Advisors website. However, the largest position is cash and cash equivalents, which represent 1.13% of the fund.
Ben Slavin, global head of ETFs at BNY Mellon, notes that investors are looking for more actively managed products to screen out small-cap laggards.
“Investor sentiment has shifted toward small caps, and that’s reflected in the numbers, in terms of where investors are putting their dollars, from a flow perspective,” Slavin said. “These types of strategies benefit.”
As of Friday’s close, the Dimension US Small Cap ETF is underperforming the Russell 2000 by more than one percent this year.