Why you shouldn't overlook small caps in your portfolio

While the S&P 500 (^GSPC) has reached record highs, the Russell 2000 (^RUT) has lagged behind as small caps struggle to keep up with the broader market. SS&C ALPS Advisors chief ETF strategist Paul Baiocchi joins Market Domination to discuss why investors should be more bullish on small caps despite their underperformance. "You have to go back to the end of the .com era to see any time when small caps, at least at a price level, have looked like this relative to large caps. Then you look at valuations and you look at the PE spread between large caps and small caps as defined by the Russell 2000 and S&P 500. And historically speaking, when you get that type of anomalous relative valuation, it does portend to potentially strong relative performance on a go-forward basis. But as always, any time there is a valuation story in the market, you have to think about what it means short-term and long-term. Valuation is not necessarily a signal for near-term outperformance, but there's reasons why small caps are relatively cheap compared to their large-cap counterparts," Baiocchi explains. He believes there are strategies for investors to get into small caps without risking too much. He points to ALPS O'Shares US Small-Cap Quality Dividend ETF (OUSM) as an opportunity as it screens for companies with high profitability, low leverage, and strong dividends. For more expert insight and the latest market action, click here to watch this full episode of Market Domination. This post was written by Melanie Riehl