Small Caps Now at Average 18% Discount to Fair Value: Time to Scoop Up Shares?
James Picerno | Apr 29, 2024 08:15AM ET
The momentum factor is on track to end April as it began: the strongest year-to-date performer among US equity factors, based on a set of ETFs through Friday’s close (Apr. 26).
In line with the broad market, iShares MSCI USA Momentum Factor ETF (NYSE:MTUM) has taken a hit in recent weeks after touching a record high earlier in the year. In relative terms, however, MTUM’s factor-leading performance in 2024 is intact, courtesy of a 14.6% year-to-date gain.
MTUM’s rally this year is twice the gain for the broad market via S&P 500 (NYSE:SPY). MTUM is also comfortably ahead of its nearest would-be factor leaders in 2024: large-cap growth (IVW) and mid-cap growth (IJK), which are tied for second place with 10% returns each so far this year.
Meanwhile, the red-ink brigade for equity factors admitted new members for year-to-date results since our Apr. 10 update: small-cap value (IJJ) and small-cap core (IJR). Joining small-cap value (IJS), it’s now a clean sweep of losses in 2024 for the small-stock category.
The weakness in low-capitalization stocks is disappointing for investors in this corner, but for contrarians, the valuations look compelling. Morningstar reports:
“Small-cap stocks trade at an 18% discount to fair value, making them the cheapest US asset class across the Morningstar Style Box,” according to analysis by the firm’s senior US market strategist Dave Sekera.
The question is whether an attractive valuation will soon lead to strong performance. The long-running underperformance of small-cap shares suggests caution (still), but hope springs eternal in this slice of the factor realm.
In an interview published yesterday by TheStreet.com, Ward Sexton, a manager of the William Blair Small-Cap Growth Fund (WBSNX), an actively managed open-end fund, says:
“There are a lot of opportunities to find misunderstood or lesser-known names that will grow to become large-caps.”
Get The News You Want
Music to the ears of small-cap investors. So far this year, however, this corner of the market is still singing off-key.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.