New Small-Cap ETF Looks for Positive Earnings Surprises

PowerShares Capital Management LLC launched a new small-cap exchange-traded fund (ETF) that looks for companies that deliver positive earnings surprises. Trading under the ticker symbol PZJ, the ETF is based on the Zacks Small-Cap Index.

The equal-weighted index comprises 250 small-cap issues with a market cap between roughly $600 million to $2 billion and an average market cap of $890 million. The index, which is constructed using a quantitative model that selects stocks based on upside earnings surprises, is considered to be taking a “semi-active” approach.

Because small-cap stocks tend to receive less analyst coverage than large- and mega-caps, they exhibit a longer lag period between positive earnings revisions and the market reaction, creating the potential to profit from the anomaly, said Bruce Bond, president of PowerShares.

The equal weighting of the index reduces style drift to give investors a “true small-cap stock exposure,” said Mitch Zacks, vice president of Zacks Investment Research Inc. The weighting also reduces risk of overexposure to speculative, rapidly rising stocks in a market-weighted index, he added.