A less risky way to invest in U.S. small-cap stocks

This ETF should offer a smoother ride and better downside protection than most of its peers.

Alex Bryan 6 February, 2018 | 6:00PM

The small-cap arena isn't the most obvious place to look for low-volatility stocks. Small-cap stocks tend to be more volatile than their larger counterparts, so a small-cap low-volatility strategy may still be too risky for the most conservative stock investors.

That said, the performance advantage from tilting toward low-volatility stocks has historically been the largest among the smallest stocks, as they are more likely to be mispriced. A big part of this edge has come from avoiding the riskiest small-cap stocks, which tend to trade at high valuations and have poor profitability, two characteristics that have historically been associated with lacklustre performance.

 PowerShares S&P SmallCap Low Volatility ETF (XSLV), which trades on the New York Stock Exchange, offers a good way to get exposure to small-cap U.S. stocks with low volatility. It should offer a smoother ride and a better risk/reward profile than the S&P SmallCap 600 and most of its peers. But it can make concentrated industry bets at times and may require high turnover. And it has a limited record. These considerations limit its Morningstar Analyst Rating to Bronze.

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About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.

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