A Spectacular Small-Cap ETF For The Trump Rally

The "Trump rally," the term applied to the post-election run-up in equities following the U.S. presidential election, ebbed a bit Monday. One trading day does not define a trend, but it is fair to say some asset classes have enjoyed the stunning election results.

ETF Strategies Post-Election

That includes small caps. Small-cap stocks and exchange-traded funds have been obvious leaders since the November 8 presidential election, a point confirmed by the widely followed Russell 2000 Index recently hitting a series of all-time highs. Investors have eagerly shifted away from defensive plays to riskier small caps following the election.

Various factors and methodologies have come into and fallen out of favor following the election. Among the weighting methodologies used by some ETFs that have been delivering for investors this month is weighting by earnings, which can be accessed with smaller stocks via the WisdomTree SmallCap Earnings Fund (ETF) (NYSE:EES). Even with Monday's decline, EES is up more than 9 percent since Election Day.

The Argument For EES

Many investors consider mid- and small-cap stocks for growth prospects and are willing to sacrifice profitability in those companies as long as the market bids those names higher. EES allows investors to tap the advantages of the mid-cap segment without being exposed to companies that are struggling to turn a profit.

An advantage offered by EES that is not found in competing small-cap strategies is that the ETF's underlying index requires member firms to have posited positive cumulative earnings over the trailing four fiscal quarters.

Federal Reserve Influence

With the Federal Reserve on course to raise interest rates next month, EES could offer investors additional near-term utility.

With the rising of interest rates due to expectations of stronger growth/higher inflation, small caps may respond most effectively. The nexus of these two themes at WisdomTree is the SmallCap Earnings Index with its double-digit exposure to banks and its focus on small caps, said WisdomTree in a note out Monday.

Small caps are seen as durable in the face of rising interest rates because many smaller companies generate the bulk of their revenue within the United States, meaning they benefit from a stronger dollar. Conversely, large-cap multi-nationals are potentially vulnerable to a stronger greenback by virtue of international sales.

Further Support For EES

EES is additionally levered to the rising rates theme via a weight of 23.5 percent to financial services (as of November 25), the ETF's largest sector allocation. Since the start of the current bull market in March 2009, EES has risen more than five-fold while the Russell 2000 has quadrupled.

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