A New Small-Cap ETF To Consider

This has been a very good year for major small-cap benchmarks. For example, the widely followed Russell 2000 Index and the S&P SmallCap 600 Index are up 24 percent and 29 percent, respectively, year-to-date.

Some small-cap strategies are doing even better, namely small-cap exchange-traded funds that focus on dividends or low volatility.

Continued success for the combination of smaller stocks, dividends and reduced volatility could prove to be a boon for the newly minted PowerShares S&P SmallCap High Dividend Low Volatility Portfolio (BATS: XSHD).

XSHD Comes To Town

The PowerShares S&P SmallCap High Dividend Low Volatility Portfolio follows the S&P SmallCap 600 Low Volatility High Dividend Index, an index comprised of the 60 members of the S&P SmallCap 600 Index that have historically provided high dividend yields with lower volatility over the past 12 months, according to PowerShares.

XSHD actually holds 57 stocks. The new ETF's largest sector allocation is 15.6 percent to real estate. The consumer staples, financial services, industrial, utilities and materials sectors also have double-digit representation in the new ETF.

Appeal Of XSHD

Small caps usually sport higher earnings multiples than their large-cap peers, but even with the dividend and low volatility buffers, XSHD is attractively valued relative to traditional small-cap benchmarks.

A potential byproduct of the underlying dividend yield and low volatility screens is exposure to value stocks in the small-cap space. XSHDs holdings are expected to trade at a discount relative to the S&P SmallCap 600 Index. The trailing 12-month price-to-earnings ratio for XSHD is 21.39, compared with 27.34 for the S&P SmallCap 600 Index, said PowerShares in a recent note.

Typically, the goal of low volatility ETFs is to perform less poorly than traditional ETFs during down markets with the trade-off being that these funds can potentially lag when stocks surge. That does not have to be the case with XSHD, at least not from a risk/reward perspective.

The differentiated risk and return profile offered by a portfolio of stocks with low volatility and high dividends means that XSHD could potentially enhance portfolio performance from both a risk and return perspective. XSHD can be combined with other factor-based ETFs, market-cap-based ETFs or active strategies to build a diversified portfolio, added PowerShares.

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