Small companies have been a major pain for investors for the better part of the last eight years.
Well into 2016, small-capitalization stocks are suddenly hot. Two of the best-performing Canadian indexes on a year-to-date basis have been the S&P/TSX Venture Index, up almost 31 per cent, and the S&P/TSX SmallCap Index, up 23 per cent. By comparison, the S&P/TSX composite was up 7 per cent.
Investors, are you ready for this? Probably not. Dividend stocks, which by nature tend to be large and well established, dominate the portfolios of the nation. There may be little or no exposure to the small companies that are leading the market right now.
Canadian small caps are dominated by the resource sector. If global economic growth disappoints yet again, these stocks could easily fall back again. But if there's more upside, and there would be if growth picks up, then you may want to see if small caps are under-represented in your portfolio. If so, consider these three options for increasing your exposure:
1.) Try a total stock market ETF: The S&P/TSX composite index holds mostly large stocks, with some medium-size companies as well. To have small caps added to the mix, look to an ETF that includes small companies, too. The Vanguard FTSE Canada All Cap Index ETF (VCN) has almost 13 per cent of its holdings in small and small-medium companies. VCN has slightly outperformed funds tracking the S&P/TSX composite this year.
2.) Add a diversified small cap ETF: The poor performance of small caps in recent years explains why Canadian ETF companies have little to offer in this niche. One fund to consider is the iShares S&P/TSX Small Cap Index ETF (XCS), which is 50-per-cent weighted to energy and materials.
3.) Add a sector-specific small cap ETF: BMO offers junior gold (ZJG), junior oil (ZJO) and junior gas (ZJN) ETFs. The gold fund is up 90 per cent this year, while the gas and oil funds are up 18.5 per cent and almost 10 per cent, respectively.
How much room might small caps have to run if economic conditions permit? Even with its year-to-date surge, XCS is down a cumulative 18 per cent in the past five years. Investors were wise to avoid small caps, but that may be changing.
Rob Carrick