Although volatility levels have increased in 2014 thanks to an unprecedented drop in oil prices and wobbling global growth, the U.S. economy continues to climb on the back of growing consumer confidence, an improving employment picture, contained inflation and decent housing data. The economy has grown 4.6% in Q2 and 5% in Q3 after a frozen Q1.
The bourses had nothing to do except follow the global economic backdrop. While the prospering U.S. economy gave these a boost, subdued foreign economies kept the run at check. The S&P 500 index (SPX), though remained above the 2,000 level for most of the second half, and is up roughly 13 percent for the year.
Performance was more muted in the small-cap space with the Russell 2000 index returning about 3.3%. These pint-sized stocks should have performed better as the pack normally generates most of their revenues from the domestic market, which makes them less ruffled in a global slowdown. However, extreme volatility, overvaluation concerns and uncertainty regarding the Fed rate hike seem to have dealt a blow to this small-sized group too.
Still, some choices held up in the down year of the small caps. Interestingly, the top performers are spread across a number of sectors, suggesting that there have been winners in various corners of the space and the strength of the sector should be taken into consideration while judging these stocks (read: 3 Outperforming Small Cap ETFs in a Choppy Market).
Below, we have highlighted the top three sector ETFs that have outplayed not only the small cap space, but also the S&P and could be worth a closer look for those with a slightly longer time horizon:
IQ US Real Estate Small Cap ETF (ROOF – ETF report)
Real Estate has been a strong performing sector this year thanks to a plunge in interest rates. Moreover, rising consumption, healing labor markets and favorable affordability favored the Real Estate market.
One ETF that has largely benefited from this trend is ROOF. This fund tracks the IQ US Real Estate Small Cap Index and holds 60 stocks in the basket. It is an unpopular choice with about $82 million in assets and is less liquid with average daily volume of under 25,000 shares. The ETF charges 69 bps in fees per year from investors.
The product is less concentrated across its top 10 securities as no stock accounts for more than 3.59% of the basket. PSCE returned close to 15.9% in the year-to-date time frame, clearly outpacing the Russell 2000 by a wide margin. The fund currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
S&P SmallCap Information technology Portfolio (PSCT)
