What is TPSC? (Pros, Cons, and Strategies)

If you're seeking a way to diversify your investment portfolio with exposure to small-cap companies, you might want to consider TPSC. Just like how SCHD is a popular choice for dividend-focused investors, TPSC, or the Timothy Plan US Small Cap Core ETF, offers a distinct set of benefits and challenges for those willing to venture into the small-cap segment. In this blog post, we'll explore what TPSC is, its key features, pros and cons, and effective investment strategies.

What is TPSC?

TPSC stands for Timothy Plan US Small Cap Core ETF. It is an exchange-traded fund (ETF) designed to give investors access to a diversified portfolio of U.S. small-cap companies while adhering to the ethical screening criteria set by the Timothy Plan.

TPSC seeks to track the performance of the S&P SmallCap 600 Index, which is a broadly diversified index representing small-cap stocks. This focus on small-cap companies offers an opportunity for high growth potential, albeit with higher volatility and risk compared to large-cap stocks.

Key Features of TPSC

• Faith-Based Ethical Screening: Timothy Plan screens out companies that participate in industries such as alcohol, tobacco, gambling, and abortion, among others, aligning investments with moral values.
• Small-Cap Focus: Invests primarily in small-cap companies which are defined as companies with market capitalizations between approximately $600 million and $2.4 billion.
• Sector Diversification: Includes a broad range of sectors to mitigate risk associated with any single industry.

TPSC Composition

The ETF is diversified across a range of sectors, including healthcare, industrials, consumer discretionary, and technology. Some of the notable companies within TPSC’s portfolio are PTC Therapeutics, Deckers Outdoor Corp, and Integra LifeSciences Holdings Corp. This diversified approach aims to spread risk across various industries, enhancing overall stability.

Pros of TPSC

High Growth Potential

Small-cap stocks generally offer higher growth potential compared to their large-cap counterparts. By investing in small, emerging companies, TPSC provides the possibility of significant capital appreciation. Historically, small-cap stocks have delivered higher returns in exchange for higher risk.

Ethical Investing

For investors concerned with the social and ethical implications of their investments, TPSC provides a way to invest in small-cap companies that align with certain moral and ethical standards. The Timothy Plan’s stringent screening process ensures that the investments avoid companies involved in activities deemed undesirable.

Sector Diversification

TPSC spreads its investments across a wide range of sectors, which helps in mitigating risks. Diversified sector exposure can protect the ETF from severe downturns in any particular industry, enhancing the fund’s overall stability and growth prospects.

Cons of TPSC

Higher Volatility

One of the main disadvantages of investing in small-cap stocks is higher volatility. Small-cap companies are generally more susceptible to economic downturns and other market fluctuations, making TPSC a riskier investment compared to large-cap-focused ETFs like SCHD.

Expense Ratio

TPSC carries a higher expense ratio compared to some other ETFs. While the expense ratio covers the cost of ethical screening and management, it may eat into overall returns, especially for long-term investors.

Less Earnings Stability

Small-cap stocks typically exhibit less earnings stability compared to large-cap stocks. Due to their smaller scale and less-established market presence, these companies are more likely to experience significant earnings fluctuations, which may affect the ETF’s performance.

TPSC Investment Strategies

Despite the challenges associated with small-cap investing, TPSC can be a valuable addition to an investment portfolio if approached with the right strategies.

Long-term Growth Strategy

TPSC is suited for investors looking for long-term growth rather than short-term gains. The high growth potential of small-cap companies demands patience, as it often takes time for these companies to scale up and deliver significant returns. A long-term investment horizon of at least 7-10 years is recommended to capitalize on the growth potential of these small-cap stocks.

Diversification

While TPSC provides sector diversification within the small-cap space, it's essential to also diversify across asset classes and regions. This can mitigate the risks associated with small-cap investments. Combining TPSC with large-cap ETFs, international stocks, and bonds can create a balanced and well-rounded portfolio.

Dollar-Cost Averaging

Given the higher volatility of small-cap stocks, employing a dollar-cost averaging strategy can minimize the impact of market fluctuations. Regularly investing a fixed amount in TPSC over time can help smooth out the effects of market volatility and reduce the risk of making poorly timed investments.

Conclusion

TPSC offers an attractive opportunity for investors interested in growth potential and ethical investing in small-cap stocks. While it comes with its own set of challenges such as higher volatility and a higher expense ratio, the diverse sector exposure and focused ethical screening provide unique advantages. Employing long-term, diversified investment strategies can help maximize the benefits of TPSC, making it a worthwhile consideration for your investment portfolio.