Small Caps and the Merits of Multifactor

MarketsETF Trends

The economic environment and policy changes under the Trump administration may help support small-capitalization stocks and related exchange traded funds ahead.

On the upcoming webcast, Small Caps and the Merits of Multifactor, Emily Roland, Head of Capital Markets Research for John Hancock Investments, and Joel Schneider, Senior Portfolio Manager and Vice President at Dimensional Fund Advisors, will consider the macroeconomic and policy conditions that support the case for investing in small-cap stocks and consider the merits of a multifactor approach to investing in this market segment.

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Specifically, John Hancock Multifactor Small Cap ETF (NYSEArca: JHSC) may be a great way for investors to gain exposure to the small capitalization segment through a rules-based indexing methodology that may potentially enhance returns and diminish downside risks.

The Multifactor Small Cap ETF will try to reflect the performance of the John Hancock Dimensional Small Cap Index, which was developed in concert with Dimensional Fund Advisors and focuses on companies whose market capitalization are smaller than the 750th largest U.S. company but excluding the smallest 4% of U.S. companies.

The smart-beta ETF follow a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying index may overweight stocks with lower relative prices and underweight names with higher relative prices. The index can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.

The underlying index also implements market-capitalization adjustments where it increases the weights of smaller companies within the eligible universe and decrease the weights of larger names. The weighting methodology help the ETF follow a more equal-weight tilt with greater exposure to smaller companies than traditional market-cap weighted index funds in an attempt to capture the size premium and limit risks associated with high-flying, larger stocks that may be overbought in an ongoing bull market rally.

Sector weights include financials 17.5%, information technology 16.0%, industrials 14.8%, consumer discretionary 14.1% and real estate 9.9%. Top holdings include Wex Inc 0.5%, Aspen Technology 0.5%, Curtiss Wright 0.5%, DST Systems 0.5% and Neurocrine Biosciences 0.5%.

Financial advisors who are interested in learning more about the small-cap segment or multi-factor strategies can register for the Tuesday, February 5 webcast here.

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