Companies with relatively small market capitalizations are often overlooked by most participants in the financial markets because they are inherently riskier than their larger peers. However, if traded correctly, this group of companies can also offer increased growth potential, which has been a goal of many since Trump took office. In the article below, we’ll take a look at the charts and try to determine the best strategy for gaining exposure to small caps while also limiting the downside risk. (For more, see: An Introduction to Small Cap Investing).
iShares Core S&P Small-Cap ETF
Exchange-traded funds are now commonly used by all types of investors for gaining exposure to certain sectors or segments of the market. Many funds are also designed to track various factors such as market capitalization. One fund that is particularly interesting when it comes to investing in small caps is the iShares Core S&P Small-Cap ETF (IJR). As the name implies, this fund has been designed to provide exposure to U.S. small-cap stocks, but in a low-cost and tax-efficient way. With an expense ratio of 0.07% and 603 holdings, it is understandable that many use this fund as a core holding within their portfolio. Taking a look at the chart, you can see that the fund has been trading within a clearly defined uptrend over the past twelve months. This chart is a textbook example of how traders expect the 200-day moving average to provide support on major pullbacks. It is also interesting to note that traders will be keeping an eye on the dotted trendlines in coming weeks because they too will likely act as guides for order placement.
We’d expect traders to hold a bullish outlook on this fund until the price closes below either the swing low of $67.33 or $63.48 depending on risk tolerance. (For more, see: Top 5 Small-Cap ETFs) .
iShares MSCI EAFE Small-Cap ETF
Investors who want to diversify their portfolios by adding international exposure may want to take a look at the iShares MSCI EAFE Small-Cap ETF (SCZ). This fund is an attractive option for traders seeking exposure to small-cap companies within Europe, Australia, Asia and the Far East. While the expense ratio is higher than IJR at 0.40%, it is still considered quite reasonable given the fact that the fund provides access to international markets with over 1,600 holdings. Taking a look at the chart, you can see the pattern looks similar to the one discussed earlier. Traders will be keeping a close eye on the dotted support level and will likely protect their positions by placing stop-loss orders below $52.09 or $50.30 depending on risk tolerance. One last thing that should be of interest to technical traders is the bullish crossover between the 50-day and 200-day moving averages (shown by the blue circle). This long-term technical buy signal will likely be used as confirmation of the next leg higher.
(For more, see: What is the Best Small-Cap ETF?).
The Bottom Line
Small-cap stocks tend to be underfollowed given their risk profile, but based on the charts discussed above; it appears as though the funds mentioned could be worth a closer look. The strong uptrends suggest that the bulls are in control of the momentum and based on technical analysis, it seems as though this story will likely continue for weeks to come. (For related reading, see: Valuing Small-Cap Stocks).
At the time of writing, Casey Murphy did not own any of the products mentioned.