Large capitalization stocks typically receive significant headlines as well as a higher share of allocated investor funds. Yet, most financial planners and academic research concur that small-cap stocks are an effective vehicle for diversification.
Recent research by Eric Sorensen and Sebastian Lancetti of PanAgora Asset Management in Boston highlighted:
"The small-cap premium appears to have waned in the last 20 years. The premium is, however, still related to economic cycles. [In the past,] small-cap stocks earned a return premium when the economy was rising, long-term rates were rising, the US dollar was rising and market volatility was falling."
Over the past several weeks, yields have been on the rise. A large number of mega- and large-cap shares have also started to lag. As a result, small caps are now receiving increased attention. We previously covered a range of exchange-traded funds (ETFs) that focus on small-cap businesses (here, here, here, here and here). Today, we introduce one more fund that might appeal to a range of readers.
The definition of small caps might differ among US brokerages and fund sponsors. But they typically have market capitalizations of between $150 million and $2 billion. Most small-cap ETFs also tend to include mid caps whose values stand between $2 billion and $10 billion.
Fund managers tend to favor small caps that have addressable markets, where sector dynamics provide tailwinds. Investors who consider investing in small businesses realize that such firms can grow earnings substantially over time.
Pacer US Small Cap Cash Cows 100 ETF
Current Price: $40.06
52-Week Range: $15.53 - $43.02
Dividend Yield: 0.64%
Expense Ratio: 0.59% per year
The Pacer US Small Cap Cash Cows 100 ETF (NYSE:CALF) invests in the top 100 businesses in the S&P 600 index based on their free cash flow yields. The fund started trading in June 2017, and net assets stand at $219.5 million.
Many analysts regard free cash flow as an essential measure of a company's financial health and future success. It is the cash left over after a firm has paid expenses and met its operating and capital expenditure requirements. Thus, management is 'free' to do whatever it deems appropriate with the amount. Companies might pay dividends, buy back shares, seek growth opportunities, acquire other businesses or simply keep the cash on the books for the time being.
Within the universe of the S&P 600 index, CALF invests in 100 companies with the highest trailing 12-month free cash flow. Over the past year, the S&P 600 has returned 98%, while year-to-date (YTD) it is up 18%. The index hit a record high on Mar. 29.
In the past 12 months, CALF returned 122% and is up 31%. It also saw an all-time high of $43.02 on Mar. 18.
The top 10 names make up close to 21% of assets. No stock has a weighting of more than 2.2%, thus, none can singularly affect the price of the fund. Among the leading stocks are the following:
- Asbury Automotive Group (NYSE:ABG) - market cap of $3.8 billion (operates car dealerships and repair centers, and sells automotive products);
- Meritage Homes (NYSE:MTH) - market cap of $3.48 billion (builder of single-family homes);
- Big Lots (NYSE:BIG) - market cap of $2.59 billion (retailer with close to 1,500 stores in US. Merchandise sold includes food, consumables, household items, toys and electronics);
- ABM Industries (NYSE:ABM) - market cap of $3.52 billion (provides facilities management services, including janitorial, parking, building and energy solutions);
- Michaels Companies (NASDAQ:MIK) - market cap of $3.11 billion (an arts and crafts specialty retailer with stores in the US and Canada);
- Signet Jewelers (NYSE:SIG) - market cap of $3.08 billion (operates jewelry stores in the US as well as the UK, Ireland and Channel Islands); and
- Select Medical (NYSE:SEM) - market cap of $4.65 billion (operator of hospitals, rehabilitation clinics and occupational medicine centers in US).
In terms of sectors, consumer discretionary has the highest weighting, with 44.9%. Next in line are industrials (22.1%), health care (8.9%), information technology (7.6%), materials (5.3%) and others.
The new earnings season might mean volatility and profit-taking in many of the names that make up CALF. A potential decline toward $37.5 would improve the margin of safety for buy-and-hold investors. We like the thematic nature and the diversity of the fund.