A pronounced shift in market sentiment toward smaller companies is providing a significant tailwind for the John Hancock Multifactor Small Cap ETF. Year-to-date gains of approximately 9.57% have seen this segment outpace major large-cap indices. This performance brings the fund’s active strategy and its associated fee structure into focus for investors seeking exposure to this rally.
Valuation Discounts and Interest Rate Sensitivity Fuel Momentum
The current momentum is largely driven by a substantial valuation gap. Data reported yesterday highlighted that small-cap stocks are trading at a 20% to 30% discount relative to the S&P 500. Furthermore, the evolving interest rate environment disproportionately benefits smaller firms. These companies often carry higher levels of variable-rate debt, meaning their interest expenses decline more rapidly than those of larger corporations when financial conditions ease. This dynamic is expected to continue supporting the earnings growth of index constituents through the end of the first quarter.
A Strategy Focused on Quality and Value
The ETF employs a rules-based, multi-factor methodology designed to select companies exhibiting both low valuation and high profitability. This systematic approach filters out the most expensive stocks within the small-cap universe, a distinct contrast to traditional market-cap-weighted indexes. The portfolio holds over 500 individual securities, including positions in firms like Revolution Medicines and Rambus, ensuring broad diversification and reducing reliance on any single stock’s performance.
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Sector allocation is a key component of the strategy. Industrial stocks represent the largest weighting at 22.1%, with financials and information technology also holding significant portfolio positions.
Assessing Costs Against Active Management
With a total expense ratio of 0.42%, the fund is priced notably higher than passive small-cap benchmarks. For comparison, the iShares Core S&P Small-Cap ETF charges 0.06%, while the iShares Russell 2000 ETF has an expense ratio of 0.19%. Investors are effectively paying for the specific factor-based selection process, which aims to achieve long-term outperformance through quality screens.
Recent data released on Tuesday indicates that assets under management have now grown to over $701 million. The fund’s current dividend yield stands at about 1.03%. Given the forecasted earnings improvements in the small-cap sector, many market participants are currently weighing the potential for further price appreciation more heavily than the fund’s cost structure.
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