Three Small Cap Sector ETFs Leading The Stock Market

new etfsCurrently, the broad markets are having trouble finding their footing due to growing concerns over the political drama in Washington. Yet, even in this backdrop, small cap securities are leading the market higher, and are easily outpacing their large and mid cap counterparts.

In fact, from a year-to-date look, small caps, as represented by the largest and most popular ETF (IWM), have added over 23%, compared to a gain of about 16% for (SPY) and just under 21% for (IJH). The small cap ETF has gathered over $5.2 billion in assets so far in the year, propelling the fund’s base to roughly $27 billion.

The surge in small caps is expected to continue at least for the rest of the year assuming the risk-on trade comes back, and investors clamor for more domestic exposure. That is because small caps have been riding high on seemingly limitless QE, and could remain top picks if Washington gets its act together (read: 3 Growth ETFs to Buy for a Continued Small Cap Surge).

Interestingly, the top performers are spread across a number of sectors, suggesting that there have been winners in every corner of the space. Given this, small cap funds could be an excellent choice for investors seeking a top pick in today’s market environment.

Below, we have highlighted the top three sector ETFs that are outperforming in the small cap space and could be worth a closer look for those with a slightly longer time horizon:

PowerShares S&P SmallCap Energy Fund (PSCE)

Energy has been a strong performing sector this year thanks to a solid trend in the energy exploration field and booming production in regions like the Dakotas and Texas. In fact, the sector has surged mainly due to a rise in U.S. oil production, which has cut down on the nation’s net oil imports (read: 3 Top Performing Energy ETFs in Focus Now).

One ETF that has largely benefited from this trend is PSCE. This fund tracks the S&P Small Cap 600 Capped Energy Index and holds 28 stocks in the basket. It is the least popular and is less liquid with AUM of $37 million and average daily volume of under 8,000 shares. The ETF charges 29 bps in fees per year from investors.

The product is largely concentrated across its top 10 securities with Gulfport Energy making up for 16.03% share alone in the basket. Other firms hold less than 9% of the total assets. About half of the portfolio is tilted toward exploration and production, closely followed by equipment & services (45%).

PSCE returned over 36% in the year-to-date time frame, clearly outpacing the broad sector fund (XLE) and other products by wide margin. The fund currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook.

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