VIDEO: ETF of the Week: SPDR Portfolio S&P 600 Small Cap ETF (SPSM)

Chuck Jaffe: One fun on point for today. The experts to talk about it. Welcome to the ETF of the week. Yes. This is the ETF of the Week where we examine trending new, newsworthy, unique and intriguing exchange traded funds with Todd Rosenbluth. He’s the head of research at verified and@verified.com. You will find every tool you need to be a better informed, with better results kind of investor in exchange traded funds.

Todd Rosenbluth, it is great to chat with you again.

Todd Rosenbluth: It’s great to be with you again, Chuck.

Chuck Jaffe: Your ETF of the week is.

Todd Rosenbluth: The SPDR Portfolio S&P 600 Small Cap ETF, SPSM.

Chuck Jaffe: SPSM, the Spider Portfolio S&P 600 Small-Cap ETF. Now everybody knows about market concentration and the rest. And here we are talking as I set up that intro. Well, there’s trending. There’s new, there’s new. The newsworthy there’s unique. This is not new, and it’s not unique. There’s plenty of stuff in the small cap space. So why this fund now?

Todd Rosenbluth: So we think that small caps have been out of favor with investors. In fact, we’ve had the equity markets for the last almost two years be driven by the magnificent seven stocks, those mega-cap growth stocks, some of them have moved out of favor. Small caps have become a smaller and unintended slice of buy-and-hold investors’ portfolios just because of the market movements.

We think many people are underexposed to small caps. We can explore this index more closely, but we think the S&P 600 is a higher-quality and perhaps more appropriate index given our environment. State Street has really used its scale to its advantage. We think that a three-basis-point exposure for this ETF makes a lot of sense.

Lastly, we are in a time period when if the Fed cuts interest rates because we’ve seen inflation adjust, we think small caps could return to favor. So now is a good time to focus on small caps.

Chuck Jaffe: Let’s dig into the index. But not just the construction of the index. But why? You want to use an index fund here instead of active management? Because, well, it verify you’re looking at every ETF. But a lot of times on the ETF for the week, you’re looking at that new fund or that new twist or what have you. And this is about as classic as you get. So why this index. But maybe first why index versus active in this space.

Todd Rosenbluth: So we want to give investors a choice. There are 3000 plus ETFs to consider. I come on on a weekly basis. I think I’ve come on recently and talked about active management because there are certainly some active managers who have demonstrated success. The firm has the heritage within that space. However, it is hard for active management to consistently outperform an index.

And that is the case in the small cap realm as well. The Spiva scorecard, which is from S&P, is the index versus active, which shows how hard it is for consistently outperformance and over a long time frame to outperform this small cap index. So, we think an index-based approach can make sense for buy-and-hold investors. And rather than sorting through who are the best active managers and whether those managers can come into play, and then you want to then decide which index based approach makes sense.

Chuck Jaffe: And that’s where you get into the nitty gritty under the hood that that I love to talk about with you.

This is a fund that if somebody has limited small cap exposure. Well, this gives you broad, small cap exposure. Is this a permanent allocation choice for people? Like, if you haven’t had small cap? Yes. This is a time to be getting it. But you expect to hold it forever. Or is this the kind of thing that, well, you know, tilt your portfolio a little bit in this way and, at some point in the future, tilt away from it? If small caps don’t turn out.

Todd Rosenbluth: So a broad small-cap ETF like SM is perfect to be part of a strategic portfolio. So most people are starting with their equity exposure with a large cap probably tied to the S&P 500. whether that’s from iShares, from Vanguard, from stage three, those are the three firms that offer those broad market strategies. We think SPX, SM can fit in nicely as part of the core.

You take on a bit more risk with small cap under or unfollowed companies, which are less proven. It’ll be a smaller slice of the portfolio tied to small caps. But we think a healthy, high single-digit exposure to small caps could make sense for investors. Then, you want to continue with any asset allocation strategy, revisit it, and rebalance to make sure you bring in some of your winners.

You add to some of your losers. And PSM, because it’s just three basis points, can be a great way of doing that. and having exposure. And I guess lastly, since you mentioned I mentioned the S&P 500, there’s no overlap between the S&P 500 companies and the S&P 600 small cap companies. It’s the same index company. So a company like Abercrombie and Fitch, which is currently the largest of those companies within CSM, you’re not going to find that within the S&P 500. It’s completely different. Index.

Chuck Jaffe: One of the things you said in there was a high single digit exposure to small caps like that is the allocation choice you’re doing. But the other thing about small caps, unlike a lot of funds that we talked about here on the show, because we’re literally talking about an index, etc., you can look at historical performance and the historical norms.

If you’re talking about like the Ibbotson study of market returns, is that the stock market returns 10%. That’s large-cap stocks, and small caps typically return a little bit better than that’s been historically close to 12%, though not recently. So the question is if somebody is going to make this that high single digit piece of their portfolio, do you expect that over time?

Todd Rosenbluth: If you hold it long enough, you will do better here than you will just with large caps because, historically, that’s been the expectation.

So, historically, small caps are, size and small size have been a relatively strong performance. So, size or small size and value-oriented stocks have historically done better. That hasn’t been the case in recent years. You know, we’ve seen large caps continue to outperform creating what we think is a buying opportunity. And with a high-quality tilt because the S&P 600 work hires companies to have a consistent earnings record in order to be a constituent.

Chuck Jaffe: So you should certainly have some exposure to small caps. You should hope that it outperforms, but you’re going to take on more risk. the companies that are in the S&P 600 are less proven companies than the apples, the Microsoft, the Coca Cola that you find within the large cap. So you want to have a healthy mix of diversification.

Todd Rosenbluth: I definitely have said that time and time again on this program.

Chuck Jaffe: Absolutely. You have. But this time, the advice. Looking at a classic fund that hasn’t been focused on before. It’s the spider portfolio. S&P 600, small Cap ETF, the ETF of the week from Todd Rosenbluth at Verify. Todd, great stuff. Thanks so much, as always. We’ll see you next week.

Todd Rosenbluth: I’ll see you next week, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. That’s me. You can read all about my hour-long weekday podcast by going to MoneyLifeShow.com, or by searching wherever you find great podcasts.

Now if you’re searching for great information on ETFs, make sure you check out VettaFi.com, as they have that great information and a full suite of tools that’s going to help you be a better investor in ETFs. They’re on Twitter or X at @Vetta_Fi. Todd Rosenbluth, their head of research, is my guest; he’s on Twitter too. He’s at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast app. We’d love to have you here every week. And until next week, happy investing, everybody!

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