Simple and Profitable Small-Cap Stock Index Fund to Invest in Presently, Costing Under $200
The financial market often experiences patterns, with certain types of stocks experiencing favoritism for a while, before being replaced by others. Frequently, these alternating groups hold contradictory characteristics, such as value and growth stocks.
Currently, one significant separation is size-based, with large-cap stocks significantly outperforming small-caps since the beginning of 2023. Eventually, this trend will shift, and the SPDR Portfolio S&P 600 Small-Cap ETF (SPSM -0.79%) may provide an opportunity to capitalize on a small-cap recovery.
The present state of the SPDR Portfolio S&P 600 Small-Cap ETF
Since the onset of 2023, the S&P 600 small-cap ETF has achieved approximately 25% growth as of this writing. While that's a noteworthy accomplishment for such a duration, the S&P 500 index (^GSPC -0.00%) has registered around 50% growth, almost double the small-cap's gain.
Historically, indexes typically exhibit similar growth patterns. Moreover, during periods of divergence akin to the present, this small-cap ETF has experienced a rally to rectify the imbalance.
The period of the pandemic, as displayed in the graph below, highlights this trend. Small-cap stocks are generally more volatile and may not be as financially robust as large-caps. Therefore, they might show more significant declines during periods of uncertainty. However, as the world became accustomed to living with COVID-19, small-cap stocks rallied vigorously, eventually aligning their performance with that of the S&P 500 index.
This alignment of performance provides a potential opportunity as the small-cap S&P index starts to regain momentum. Moreover, the ETF's price, currently under $50 per share, is within reach for investors with limited resources.
The function of the SPDR Portfolio S&P 600 Small-Cap ETF
The S&P 500 index consists of around 500 companies, representing a broader economic sector, primarily comprising large, well-known stocks.
In contrast, the SPDR Portfolio S&P 600 Small-Cap ETF is constructed by incorporating an estimated 3% of the smallest U.S. stocks. A team selects 600 companies for inclusion, and replaces index constituents as necessary due to factors like mergers, acquisitions, or bankruptcies. However, it's worth noting that at the time of inclusion, each chosen company must meet specific profitability criteria.
The first criterion involves the company's most recent quarterly earnings remaining positive. The second criterion requires that the cumulative profit from the trailing four quarters remains positive. While this might not be a challenge for a large corporation, it may effectively eliminate problematic companies within small corporations.
As a result of these requirements, the index is intended to favor higher-quality small-cap stocks. Since the ETF is market-cap weighted, the largest small-cap companies significantly impact performance.
In essence, investing in the SPDR Portfolio S&P 600 Small-Cap ETF provides a diversified portfolio of strong-performing small-cap businesses. The ETF's expense ratio is a minuscule 0.03%.
Worth revisiting if you subscribe to the principle of regression towards the mean
Past performance is in no way indicative of future outcomes, as financial experts often assert. Furthermore, there isn't a specific time frame for small-cap stocks and the small-cap ETF to surpass large-cap performances.
Nonetheless, unless you believe that large caps have permanently bettered small caps (an unlikely scenario, given market history), this may be a suitable moment to think about incorporating more small-cap exposure into your investment portfolio. And the SPDR Portfolio S&P 600 Small-Cap ETF offers an easy, low-cost, and quality-bias solution to accomplish this.
After observing the significant outperformance of large-cap stocks since the beginning of 2023, investing in small-cap stocks, such as those represented in the SPDR Portfolio S&P 600 Small-Cap ETF, could be a strategic move for finance and investment purposes, as historical trends suggest a possible shift in market favoritism.
Investing in the SPDR Portfolio S&P 600 Small-Cap ETF provides an opportunity for individuals with limited resources to own shares of a diversified portfolio of strong-performing small-cap businesses, taking advantage of their potential growth in the future.