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Why To Rotate Small Cap Sectors in May

According to research published this week by my colleague Sam Stovall, US equity strategist for S&P Capital IQ, since 1979, small-cap stocks posted their strongest six-month average return from November 1 through April 30, recording an advance of 10.5% (excluding dividends), versus an average gain of 6.3% for all months. 

Some sectors have their day in the summertime sun, while others skate along smoothly in winter according to Stovall. For instance, since 1995, the S&P SmallCap 600 consumer staples and health care groups posted average price gains of 5.3% and 5.4%, respectively, to the S&P SmallCap 600's average rise of 2.5%. Meanwhile the S&P SmallCap 600 consumer discretionary sector declined on average 0.8%.

Therefore, should you believe small caps face a challenging period ahead, you may want to consider this semi-annual rotation strategy and thankfully there are PowerShares ETFs that offer small-cap sector exposure.

PowerShares S&P SmallCap Consumer Staples (PSCC) has only $35 million in assets and has a 0.29% expense ratio. However, it has only 17 holdings, less than half the 38 in the Consumer Staples Select Sector SPDR (XLP). Packaged food & meats companies such as Sanderson Farms (SAFM) make up 41% of PSCC's assets, while the sub-industry is just 17% of XLP. Meanwhile, household product companies such as WD-40 Company (WDFC) make up only 9% of assets, instead of 19% for XLP.

The PowerShares S&P SmallCap Heath Care Portfolio (PSCH) a $212 million ETF has 71 holdings, more than the 55 for its larger-cap peer Health Care Select Sector SPDR (XLV). However, PSCH's largest sub-industry exposure is to health care equipment companies (23% of assets) such as Abiomed (ABMD). Meanwhile, pharmaceuticals make up just 9% of PSCC assets through companies such as Prestige Brands Holdings (PBH) a far smaller percentage than the 42% for XLV.

S&P Capital IQ has research and rankings on the above mentioned sector ETFs.

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