These Small-Cap ETFs Have Attractive Valuations
On the first trading day of 2013, the iShares Russell 2000 Index Fund (NYSE: IWM) hit a fresh all-time high and even with a small loss in Thursday's session, IWM is flirting with $87. IWM, the largest small-cap ETF by assets with almost $17.7 billion under management, is up 4.1 percent in the past week, 5.6 percent in the past month and 15.5 percent in the past year.
Those are all impressive numbers and they come at a cost. Meaning IWM is pricey on a valuation basis compared to select global and small-cap sector ETFs. IWM has a price-to-earnings ratio of 25.22 and a price-to-book ratio of 3.1, according to iShares data.
Fortunately, IWM's lofty valuations do not permeate the entire universe of small-cap ETFs. That means investors can tap into the growth potential of small-caps without the specter of frothy valuations. Importantly, low market value stocks at reasonable valuations can be found across the board in terms of U.S. sectors, developed and emerging markets funds. Consider the following.
IndexIQ Canada Small Cap ETF (NYSE: CNDA) One need not look far away from the U.S. to find small-caps that are inexpensive. CNDA has a P/E of less than 15 and a price-to-book ratio of 2.28, according to IndexIQ data. However, there is reason CNDA offers attractive valuation metrics: The fund has slid 10. 5 percent in the past year.
That does not mean CNDA cannot rebound. It can, but it must be noted that this ETF allocates a combined 73 percent of its weight to materials and energy stocks. In the case of CNDA's 45.7 percent weight to materials names, it is gold and silver miners that loom large and that is likely what has weighed on the ETF. On the other hand, if precious metals miners rebound, CNDA is one ETF that investors will want to take note of.
Market Vectors Latin America Small-Cap Index ETF (NYSE: LATM) Considering this ETF has been around for nearly three years and that it tracks a region that is popular with investors, it would be reasonable to expect this fund would have more than $13.8 million in AUM. It does not and that mead some to think LATM is a "bad" ETF. The opposite is true and a 10.9 percent gain in the past year speaks to that fact.
LATM does feature a drawback similar to CNDA in that materials names account for 27 percent of the fund's weight. And like CNDA, LATM's exposure to that sector comes via gold and silver miners. Fortunately, LATM has two important traits that go unnoticed. First, discretionary and staples combine for over 28 percent of LATM's weight, giving the ETF some value as a play on the emerging markets consumer theme.
Second, although Brazil accounts for 35 percent of LATM's country weight and it is easy to get exposure to Brazilian small-caps through other ETFs, LATM is one of the best ways to play Mexican and Chilean small-caps as those two countries combine for 24 percent of the fund's weight. Investors get all that with a P/E of about 15 and a price-to-book ratio around 1.5.
PowerShares S&P SmallCap Consumer Staples Portfolio (NASDAQ: PSCC) The PowerShares S&P SmallCap Consumer Staples Portfolio is one of those ETFs that critics love to hate. It trades less than 4,800 shares per day on average and has just $28.5 million in AUM. Well, ignorance can be bliss, but that does not mean ignorance is wise when it comes to ETFs because PSCC is up 14.1 percent in the past year.
Since PSCC debuted in April 2010, the ETF has surged by over 37 percent. Over the same time, IWM is in the red. Over the past year and since its debut, PSCC has also sharply outperformed its large-cap equivalent, the Consumer Staples Select Sector SPDR (NYSE: XLP).
An important aspect of PSCC is that it is not home to obscure names. Rather, it is like XLP in that it is also home to familiar brands. Hain Celestial (NASDAQ: HAIN) and Casey's General Stores (NASDAQ: CASY) combine for almost 23 percent of PSCC's weight while other familiar holdings include WD-40 (NASDAQ: WDFC) and Boston Beer (NYSE: SAM).
PSCC has a P/E ratio of 18.38 and a price-to-book ratio of 2.19, ,according to PowerShares data.
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