An ETF Built For The Strong GDP Life

The Commerce Department recently said the U.S. economy grew 4.1 percent in the second quarter. On Monday, some major Wall Street banks boosted 2018 GDP growth estimates.

Due to the domestic focus of the asset classes, small-cap stocks and exchange traded funds are more levered to a growing economy than other market capitalization segments. One ETF in particular could really benefit from ongoing U.S. economic growth.

What Happened

That ETF is the Invesco S&P SmallCap Financials ETF PSCF, the small-cap equivalent of the popular Financial Select Sector SPDR XLF. PSCF is up almost 7.7 percent, beating the large-cap XLF by a margin of nearly 6-to-1.

“While U.S. GDP growth is beneficial for stocks in general, the growth has been better for small caps than for large- or mid-caps,” said S&P Dow Jones Indices in a recent note. “On average for every 1% of GDP growth, the S&P SmallCap 600 has risen 5.2%, while S&P MidCap 400 and S&P 500 have risen a respective 4.9% and 4.0%.  Within small caps, the financials, health care and energy sectors have risen most with growth, gaining on average 6.9%, 6.4% and 6.3%, respectively for every 1% of GDP growth.”

Why It's Important

PSCF tracks the S&P SmallCap 600 Capped Financials & Real Estate Index, a derivative of the S&P SmallCap 600 Index. The Invesco ETF's 132 holdings have an average market value of $1.96 billion, putting the fund at the higher end of the small-cap spectrum.

While PSCF devotes almost 30 percent of its weight to real estate investment trusts, an asset class historically vulnerable to rising interest rates, the fund offsets that vulnerability with significant exposure to community and regional banks as well as insurance providers. Insurance companies and regional banks are positively correlated to rising Treasury yields.

What's Next

Next for PSCF could be more new highs. The fund resides just 1.25 percent below its 52-week high and is up 12.37 percent over the past half year.

“Although in small caps, financials have delivered 50 basis points more of return than health care from each 1% of GDP growth on average, the financial small cap premium is by far the most sensitive to GDP growth. For every 1% of GDP growth on average, small cap financials have returned 2.4% more than large cap financials,” according to S&P Dow Jones.

Disclosure: The author owns shares of XLF.

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