Stock selection can be the key to gaining exposure to small caps.
Rob Harvey, who is behind it Dimensional US small cap ETFtakes an actively managed approach to purchasing the group. He tries to avoid small caps that perform poorly and drag the index down.
“There's no reason to hold companies that are really at the bottom of the barrel in terms of profitability,” the company's co-head of product specialists told CNBC's “ETF Edge” this week. “You remove these from your small-cap universe, [and] There’s a lot you can do to increase returns.”
The Russell 2000which tracks small caps, is up more than 12% so far this year. Now even wider S&P 500 is up about 23% over the same period.
Thursday was the fund's largest positions Sprouts Farmers Market, Abercrombie & Fitch, Factoryaccording to the Dimensional Fund Advisors website. However, the largest holding is cash and cash equivalents, which makes up 1.13% of the fund.
Ben Slavin, global head of ETFs at BNY Mellon, notes that investors are looking for more actively managed products to weed out small-cap laggards.
“Investor sentiment has shifted toward small caps, and you can see that in the numbers where investors are putting their dollars from a capital flow standpoint,” Slavin said. “Such strategies are beneficial.”
As of Friday's close, the Dimensional US Small Cap ETF is underperforming the Russell 2000 by more than 1 percent this year.