As is the case with large-cap equities, in the world of small-caps, there’s often a value vs. growth debate. It’s an argument that’s garnered more attention in recent due in part to the success of large-cap growth names and as some investors started questioning the once enviable history of the small-cap value combination.
Small-cap value is “one of the rare tilts with decades of evidence, a plausible economic story, and enough discomfort attached to it that many investors abandon it at exactly the wrong time. The premium exists in the data,” notes Summitward. “It shows up internationally. And it remains hard to hold in practice because the ride is psychologically brutal.”
Another reason for the small-cap value vs. growth debate is that smaller growth stocks, particularly those in the healthcare and technology sectors, often are not profitable where as a higher percentage of small-cap value names do generate positive earnings. Still, history proves that are plenty of occasions when unprofitable names lead small-caps to the upside.
It’s all a lot to take in, but at the small-cap value vs. growth party, advisors and investors don’t have to pick one or the other because thanks to the Invesco S&P SmallCap Momentum ETF (XSMO).
Examining XSMO
Momentum itself is a factor and as advisors and experienced investors know, momentum is factor-agnostic when it comes to growth and value, indicating that this Invesco ETF is relevant in discussing small-cap value vs. growth.
The $2.9 billion XSMO, which turns 22 years old next March, tracks the S&P Smallcap 600 Momentum Index, which is the momentum offshoot of the S&P SmallCap600. Proving that advisors need split hairs in the small-cap growth vs. value quibble, XSMO beat the bellwether S&P SmallCap 600 ETF as well as the growth and value equivalents by sizable margins over the past three years.
Bottom line: This ETF does it job, does it well and settles the small-cap growth vs. value argument without getting involved at all. There’s something to be said for winning with neutrality.
(Chart Courtesy: ETF Replay)
Fortunately, it’s easy to understand how XSMO delivers the goods.
“The S&P SmallCap 600® Momentum Index is designed to measure the performance of securities in the S&P SmallCap 600 universe that exhibit persistence in their relative performance,” according to S&P Dow Jones Indices.
XSMO Settles the Small-Cap Value vs Growth Debate
The plumbing of XSMO’s index highlighted above is notable because it drills home the aforementioned point that momentum is sector-agnostic. Said another way, XSMO’s 108 holdings hail from some sectors that are considered value groups and others typically known as growth havens.
Growth enthusiasts are apt to like the fact that XSMO allocates more than 26% of its portfolio to healthcare and technology stocks while profit/quality/value purists may find comfort in the fact that the ETF has a combined weight of 39% to industrial and financial services names.
