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The Case for Small Cap, Quality and Value.

The PACER PERSPECTIVE
March 2019

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The Case for Small Cap,
Quality and Value.

- Michael Mack, Portfolio Manager

One of the most popular asset classes available to investors has been the small cap value space. Small cap companies are those with somewhat smaller market capitalization, which can range from just $300 million to $2 billion.

 

Large cap companies, on the other hand, are companies with market capitalization of over $10 billion. Small cap and large cap companies can be defined as growth or value companies: growth companies are expected to grow their earnings at above average rates, while value companies are undervalued in price based on fundamentals.

Growth and Value Investing
1970-2018

Hypothetical value of $1 invested at the beginning of 1970. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2018 Morningstar. All Rights Reserved.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
About the data:
Growth and value stocks in this example are represented by the Ibbotson Associates Growth and Value Indexes for 1970–97 and the Morningstar Style Indexes thereafter. The Ibbotson Associates Growth and Value Indexes are calculated based on data from the CRSP US Stock and Index Databases, the Center for Research in Security Prices (CRSP®), and the University of Chicago Booth School of Business. Used with permission.

Historically, small-cap stocks have outperformed large-cap stocks, while value stocks have outperformed growth stocks. But within small-cap stocks, the greatest performance differential has been between value and growth.

According to Morningstar, small-cap value catapults past small-cap growth, large-cap value, and large-cap growth, ending with nearly 14% compound annual return. Over time, this performance differential would have resulted in an investment value four times that of large cap value. Investors looking to improve their returns may want to consider looking to overweight small-cap value stocks, despite the larger risk.

Small Cap's Performance Then and Now

Source: Bloomberg
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. YOU CANNOT INVEST DIRECTLY IN AN INDEX

However, recently small cap has underperformed with the heightened market volatility and increased credit concerns. As a result, small-cap value stocks have been trading at discounted prices to what their averages have been in the past. This discount may signal an opportunity for investors to shift their portfolio allocations toward small-cap value to take advantage of these attractive valuations.

Source: FactSet, Russel Investment Group, Standard & Poor’s, J.P. Morgan Asset Management.
Data is based on Russell style indices with the exception of the large blend category, which is based on the S&P 500 Index. Past performance is not indicative of future returns. The price to earnings is a bottom-up calculation based on the most recent index price, dividend by consensus estimated for earnings in the next 12 months (NTM), and is provided by FactsSet Market Aggregates.
Guide to the Markets – U.S. Data are as of February 28, 2019..

Source: FactSet
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. YOU CANNOT INVEST DIRECTLY IN AN INDEX

Consider the Pacer US Small Cap Cash Cows 100 Strategy

When it comes to the small cap space, small caps are cheap on a relative and historical basis. The Pacer US Small Cap Cash Cows 100 ETF (CALF) consists of 100 small cap stocks that:

  • Are all profitable.
  • Have higher free cash flow and free cash flow yield than the S&P SmallCap 600®.
  • Have lower leverage.

CALF offers investors a way to gain exposure to high-quality companies with high free cash flow yields and strong balance sheets, and now is the time to see if it might fit into your portfolio.

This document does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Please consult with your financial advisor and tax advisor before investing.

This document is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This document represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. The user of this information assumes the entire risk of any use made of the information provided herein. There is no guarantee this strategy will be successful.

EBITDA: earnings before interest, taxes, depreciation and amortization, is a measure of a company’s overall financial performance and is used as an alternative to simple earnings or net income in some circumstances.
P/E ratio a fundamental measure commonly used to determine if an investment is valued appropriately. Each holding’s P/E is the latest closing price divided by the latest fiscal year’s earnings per share. Negative P/E ratios are excluded from this calculation.
S&P 500® Index is a stock market index that tracks stocks of 500 large-cap U.S. companies.
Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.

The Pacer US Small Cap Cash Cows Index was released on 5/29/17.


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