Election Year Trends Don't Favor These ETFs

It has been a ho-hum year for small-cap stocks as highlighted by a gain of 0.75 percent for the benchmark Russell 2000, and things are mixed for micro-cap exchange-traded funds — as just one of the three ETFs dedicated to smaller small-caps is up on the year.

An interesting election year phenomenon could be to blame for the slack showings for micro-caps to this point in the year, and investors should be careful if they are hoping for significant upside for these ETFs as Election Day nears.

Election Trends

“As the US rapidly moves toward its next general presidential election, FTSE Russell examined the historical backtested performance of the Russell Microcap Index in more detail, finding that election year returns have been particularly variable for US microcaps. Specifically,  general election years featuring an incumbent, notably 2004 and 2012, have been much kinder to microcaps than 'open election' years featuring an entirely new slate of candidates, notably 2008 and thus far in 2016,” said FTSE Russell, one of the largest providers of indexes for use with ETFs.

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The $702.3 million iShares Russell Microcap Index (ETF) IWC follows the Russell Microcap Index and is home to nearly 1,420 stocks. Year-to-date, IWC is down 2.7 percent.

The Wilshire Micro-Cap ETF (based on the Wilshire US Micro-Cap Index) WMCR, which follows the Wilshire US Micro-Cap Index, is off 3.7 percent this year. The PowerShares Zacks Micro Cap (ETF) PZI, which follows the Zacks Micro Cap Index, is bucking the aforementioned micro-cap election year trend with a gain of 1 percent.

Why PZI?

The reason why PZI is outperforming rival micro-cap ETFs is somewhat obvious. Healthcare stocks have been plagued by election year rhetoric and PZI allocates just 3.5 percent of its weight to that sector whereas IWC and WMCR each allocate more than 18 percent of their respective lineups to healthcare names.

PZI allocates nearly half its weight to financial services names, which are pricing in a June rate hike from the Federal Reserve. IWC allocates over 31 percent of its lineup to financial services names, making that sector the ETF's biggest sector weight.

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“Whether it is about ‘hope and change’ as then candidate Barack Obama pledged in 2008, or presumptive nominees Donald Trump pledging to ‘make America great again’ and Hillary Clinton’s ‘fighting for us’  in our current general election campaign, market indexes tend to reflect the market anxiety and uncertainty that is a natural by-product of political change. And while four presidential elections years don’t necessarily make a definitive trend, index returns indicate that market uncertainty has not been kind to the smallest listed US companies,” said Catherine Yoshimoto of FTSE Russell in a note.

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