Small-Cap ETFs For A Stronger Dollar

The dollar is gaining strength and recently touched a multimonth high against a basket of rival developed market currencies. Conventional wisdom dictates that large-cap companies, many of which generate substantial portions of their revenue overseas, are vulnerable to a stronger dollar.

Conversely, small-cap stocks and exchange traded funds can be sturdy as the greenback rises, as smaller companies are usually more focused on the domestic economy. 

“The S&P 500 has 70.9 percent of revenue from the U.S.,” S&P Dow Jones Indices said in a recent note. “That is less than the 73.3 percent of U.S. revenue in the S&P MidCap 400 but is much less than the 78.8 percent of U.S. revenue generated in the S&P SmallCap 600.”

What Happened

Data suggest that within the small-cap universe, growth and value stocks generate significant portions of their revenue on a domestic basis. For the S&P SmallCap 600 Growth Index, the domestic revenue figure is 80.6 percent while it is 78.6 percent for the S&P SmallCap 600 Value Index, according to S&P Dow Jones Indices.

The PowerShares S&P SmallCap 600 Pure Growth Portfolio RZG tracks the S&P SmallCap 600 Pure Growth Index, which measures sales growth, earnings change vs. price and momentum factors.

RZG's value counterpart is the PowerShares S&P SmallCap 600 Pure Value Portfolio RZV. RZV's 165 holdings, which have an average market value of $914 million, are evaluated based on book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio.

Why It's Important

The three sectors that generate the largest percentages of their revenue on a domestic basis — telecommunications, utilities, and real estate — are usually lightly represented in small-cap funds. Some small-cap funds are heavy on three sectors that depend on the domestic economy for large chunks of their sales: health care, financial services and consumer discretionary.

RZV, the small-cap value ETF, allocates nearly 33 percent of its weight to consumer discretionary stocks, by far its largest sector weight. Financial and health care names combine for 16.43 percent of the fund's weight.

RZG, the small-cap growth fund, devotes almost 28 percent of its roster to health care names and 14.69 percent to consumer cyclical stocks.

What's Next

"The S&P SmallCap 600 is 3.1 times more sensitive to the falling dollar than a rising one but does better than large- or mid-size companies when the dollar rises,” according to S&P Dow Jones. 

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