Don't Forget About This Small-Cap Health Care ETF

Investors in large-cap health care stocks, even the supposedly ultra-conservative plays such as blue-chip pharmaceuticals names, have been treated to some stellar returns this year.

That much is affirmed by better than 26 percent year-to-date gains for both the Health Care Select Sector SPDR (NYSE:XLV) and the Vanguard Health Care ETF (NYSE:VHT).

Investors willing to take on a bit more risk have captured impressive gains with ETFs such as the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) and the Market Vectors Biotech ETF (NYSE:BBH). However, all of those ETFs are heavy on large-cap stocks. With the largest pharmaceuticals and biotech names thriving, some investors may wondering if the same can be said of small-cap health care plays.

The PowerShares S&P SmallCap Health Care Portfolio (NASDAQ:PSCH) confirms the answer is "Yes, small-cap health care ETFs are tracking their large-cap rivals higher." Actually, in the past 90 days, PSCH, designed to be the small-cap equivalent of XLV, has decoupled from its large-cap rival in stunning fashion. In that time, XLV is up six percent, a decent performance to be sure. PSCH has more than tripled those returns.

Looking at PSCH's 66-stock lineup, it is easy to see why the ETF has recently been offering investors a stunning level of out-performance relative to more traditional health care funds. The PowerShares offering is heavily allocated to biotech names. That makes sense as there are many more small-cap biotech names than there are small, regular pharmaceuticals firms.

PSCH's top-10 holdings include PAREXEL International (NASDAQ:PRXL), a provider of clinical research and medical communications services, and Salix Pharmaceuticals (NASDAQ:SLXP). S&P Capital IQ has a five-star rating on PAREXEL and a four-star rating on Salix.

Those stocks combine for 9.2 percent of PSCH's weight. "PSCH ranks well for its bullish technical factors and its relatively modest expense ratio," said S&P Capital IQ in a new research note. The firm has an Overweight rating on PSCH.

PSCH does feature 14.2 percent allocation to mid-cap growth names, but this is really a small-cap growth ETF with stocks with that designation accounting for 69.3 percent of the ETF's weight. The fund stacks up favorably against broad market small-cap growth ETFs. For example, the SPDR S&P 600 Small Cap Growth ETF (NYSE:SLYG) is up 19.2 percent year-to-date. That is nothing to scoff at, but PSCH has jumped nearly 26 percent.

Given its small-cap constituency, speculative investors can embrace PSCH as a play on a potential increase in biotech mergers and acquisitions activity.

In terms of valuation, small-cap growth names usually trade at some premium to the broader market, but PSCH is not too frothy relative to SLYG. The latter has a P/E ratio of 21.36 while PSCH's P/E is 23.48, according to PowerShares data.

PSCH, which debuted in April 2010, has $120.2 million in assets under management and annual fees of 0.29 percent.

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