If you were to cross a Bugatti Veyron with a McLaren F1 -- two cars capable of reaching 60 mph in less than 3.2 seconds -- you'd get a super machine able to leap tall buildings in a single bound.
You get the same power when you take two high-flying sectors of the market and combine them into a single exchange-traded fund (ETF). That is the true beauty behind ETFs: the ability to invest in very precise niches of the market that, when multiplied, result in head-turning returns.
Today, let's look at a combination of small caps with health care and technology.
Small-caps stocks have been on a tear and are poised to continue their streak for some time longer. The iShares S&P Small-Cap 600 ETF (NYSE: IJR) hit an all-time high Oct. 29 and is up about 28% year to date. In fact, this index of core small caps is up 36% over the past 12 months, 50% over the past two years and 130% over the past five, outpacing the Dow Jones Industrial Average on all fronts.
As Bloomberg reports, in three out of the past four periods in which small-caps trounced the Dow so dramatically, equities kept moving higher and the U.S. economy strengthened the following year.
Investing in individual small-cap stocks can be tricky, though. They're capable of running up the hill very quickly but going downhill twice as fast -- with a steeper drop.
That's why I love these two ETFs: PowerShares S&P SmallCap Health Care (Nasdaq: PSCH) and PowerShares S&P SmallCap Info Tech (Nasdaq: PSCT). Up 38% and 33% year to date, respectively, these two top-performing ETFs offer safer ways to capitalize.
Let's take a look at each ETF.
|PowerShares S&P SmallCap Health Care|
|This ETF benefits directly from the trends of the "Graying of America," higher medical costs, the Affordable Care Act (aka Obamacare), etc. The 65 companies that make up the ETF obviously do business in health care products and services, but that includes a nice mix of pharmaceuticals, medical technology and supplies, and biotechnology.
While 72.9% of the fund is composed of small-cap growth companies and another 16.5% is small-cap value stocks, it includes a 10.6% stake in mid-cap growth as well. Its top holdings include:
Centene (NYSE: CNC), a company involved in Medicare and Medicaid programs and services. Its revenue from services for the third quarter totaled $2.7 billion, a 24% increase from the same period last year. CNC is up 35% year to date.
Align Technology (Nasdaq: ALGN), maker of invisible dental braces, reported a 62% increase in third-quarter revenue over 2012. ALGN is up nearly 100% in 2013.
Questcor Pharmaceuticals (Nasdaq: QCOR), maker of drugs for the treatment of multiple sclerosis, has been popular as of late, with an average 1.1 million shares trading over 30 days. No surprise why: QCOR is up 109% year to date.
With average trading volume around 28,000 shares a day and $156 million in assets, PSCH is a thinly traded ETF with plenty of potential.
|Powershares S&P SmallCap Info Tech|
|Small caps and information technology (IT) stocks are a match made in heaven. IT is perhaps the largest growing market domestically and internationally with plenty of smaller companies positioned to take their share of it.
Plus, the 165 holdings in this ETF give it diversity, as well as tech exposure apart from the biggest players, which are more correlated to U.S. politics and slow international sales.
The ETF's top holding, FEI Co. (Nasdaq: FEIC), produces transmission and scanning electron microscopes for nanoscale applications. Up 53% year to date, FEI reported $251 million in net bookings in the third quarter, the highest in the company's history.
Maximus (NYSE: MMS) provides health and business processing services and also profits from the Affordable Care Act, much like the companies in PSCH. Its 2013 third-quarter revenue increased by 26%, while new orders totaled $413 million. The stock is up 47% this year.
Belden (NYSE: BDC), a global leader in signal transmission solutions for mission-critical applications, reported third-quarter revenue of $522.5 million, up 12.3% from a year ago.
With average trading volume around 35,500 shares a day and $199 million in assets, PSCT is also a thinly traded ETF expected to trend higher into 2014.
Risks to Consider: Investments that trade thinly -- especially small-cap stocks -- can be volatile on the up- and downside. Because performance of nearly all small-cap stocks is tied to the domestic scene, they will be the first to succumb if the economy falters.
Action to Take --> Investors with room in their portfolios for speculative ETFs may want to consider a 5% stake in both PSCH and PSCT.