Why a stock picking approach to small caps may boost performance right now

cnbc.com:

Stock picking may be the key to getting exposure to small caps.

Rob Harvey, who's behind the Dimensional U.S. Small Cap ETF, uses an actively managed approach to buying the group. He's trying to avoid small caps that are underperforming and dragging down the index.

«There's no reason to hold companies that really are scraping the bottom of the barrel in terms of profitability,» the firm's co-head of product specialists told CNBC's "ETF Edge" this week. «You remove those from your small cap universe, [and] you can do a lot for boosting returns.»

The Russell 2000, which tracks small caps, is up more than 12% so far this year. Meanwhile, the broader S&P 500 is up about 23% in the same time frame.

As of Thursday, the fund's top holdings were Sprouts Farmers Market, Abercrombie & Fitch, Fabrinet, according to the Dimensional Fund Advisors website. However, its top holding is cash and cash equivalents, which accounts for 1.13% of the fund.

Ben Slavin, who's global head of ETFs for BNY Mellon notes investors are looking for more actively managed products to screen out small cap laggards.

«Investor sentiment has shifted towards small caps, and you see that in the numbers, in terms of where investors are putting their dollars, from a flow standpoint,» said Slavin. «These types of strategies are benefitting.»

As of Friday's close, the Dimension U.S. Small Cap ETF is underperforming the Russell 2000 by more than one percent this year.