SPSM: A Good Way To Get Low-Cost Small Cap ExposureSmall Caps 0 replies 0 likes 0 votes 245 views
In the world of investing, diversification is a golden rule. When it comes to diversifying your portfolio, small-cap stocks can be a valuable addition. They offer attractive growth potential, and SPSM, the SPDR Portfolio S&P 600 Small Cap ETF, provides a cost-effective way to gain exposure to this segment of the market. Let's delve into the details.
Meet SPSM: The Low-Cost Small Cap ETF
SPSM is an exchange-traded fund (ETF) that tracks the S&P 600 Small Cap Index. What makes it particularly appealing is its minuscule expense ratio of just 0.03%. For those looking to invest without breaking the bank on fees, this is a compelling feature.
Moreover, it's essential to know that the S&P 600 Small Cap Index has some stringent criteria. Companies in this index must have had positive earnings over the past four quarters. This profitability requirement filters out companies that might not be as financially sound, offering investors a degree of safety.
The index is also designed to be representative of the small-cap space, which is essential when selecting an ETF. It's float-adjusted and market-cap weighted, ensuring a balanced exposure to various small-cap stocks.
Why Small Caps May Shine in the Next Decade
The debate between small-cap and large-cap stocks has been ongoing in the investment world. While small caps may be more volatile in the short term due to their sensitivity to economic cycles and their less diversified revenue streams, they have some factors working in their favor that could lead to outperformance in the next decade.
Attractive Valuations: Small-cap valuations are currently more attractive than their large-cap counterparts. The price-to-book (P/B) ratio for small caps is at a 57% discount to that of the S&P 500, a figure not seen often in the last 20 years. This presents an opportunity for investors looking for value.
Potential for Long-Term Growth: In a market where large caps are trading at stretched valuations, small caps may offer long-term potential. SPSM's benchmark, the S&P Small Cap 600 Index, puts more emphasis on smaller, more profitable firms compared to other benchmarks like the Russell 2000. This strategic focus has historically resulted in stronger returns, outperforming the Russell 2000 by about 1.7% per year since 1994.
Higher Growth Potential: Small-cap companies are often more innovative and disruptive than their larger counterparts. They have more room to grow, less competition, and a higher potential for long-term growth.
Favorable Economic Trends: In the current economic environment, small caps may benefit from higher interest rates and inflation. Large-cap companies, with their reliance on debt and higher costs, can be hurt by these factors. In contrast, small-cap companies can pass on these costs to their customers more effectively.
On-Shoring Trend: The trend toward on-shoring, where companies bring their operations back to the United States, can favor small caps. They are often based in the U.S. and have less exposure to overseas markets. This makes them less vulnerable to tariffs and trade disruptions.
SPSM Portfolio Characteristics
As of October 26, 2023, here are some key portfolio characteristics for SPSM:
Weighted Average Market Cap: $2.34 Billion
Estimated 3-5 Year EPS Growth Rate: 7.82%
Price/Earnings Ratio: 11.57
Price/Book Ratio: 1.43
30 Day SEC Yield: 2.15%
Fund Distribution Yield: 1.10%
Assets Under Management: $7.54 Billion
With these characteristics, SPSM offers a well-rounded exposure to small-cap stocks with a focus on growth potential.
One of the standout features of SPSM is its low expense ratio of just 0.03%. This figure was reduced from the original 0.05%, making it one of the lowest-cost small-cap blend ETFs available. It's crucial for investors to keep an eye on expenses, as they can eat into returns over the long term.
SPSM's low expense ratio positions it as an attractive choice for investors who want to keep costs to a minimum while gaining exposure to small-cap stocks.
Past Performance and Outlook
Historically, SPSM has performed well over longer time periods. While it may have underperformed some of its peers recently, it's important to note that investment performance can vary over shorter time frames.
As of October 27, 2023, SPSM has had the following performance figures:
1 Year: -6.99%
3 Year: +7.42%
5 Year: +4.92%
10 Year: +6.22%
These figures indicate that SPSM has shown resilience and the potential for long-term growth.
Diversification and Liquidity
With $7.5 billion in assets invested in 601 securities, SPSM provides investors with diversification across a range of small-cap stocks. This diversification can help spread risk and reduce the impact of individual stock price fluctuations.
Furthermore, SPSM is quite liquid, trading about 1.25 million shares a day. This liquidity allows investors to enter and exit positions with ease, providing flexibility in managing their investments.
SPSM, the SPDR Portfolio S&P 600 Small Cap ETF, is an attractive option for investors looking to gain exposure to