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Small-Cap ETFs Looking Good to Bet On: Let's Explore

Considering the upbeat scenario around small-cap ETFs, let's glance through some funds for investors to bet on.

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This story originally appeared on Zacks

Wall Street has got a reason to cheer up amid the September dullness. The Federal Reserve led to market rallies by not hinting on any immediate move to taper the bond purchasing program and keeping the benchmark interest rates unchanged. The Dow Jones Industrial Average was up about 1% on Sep 22, seeing its first positive session in five and best day since Jul 20. Going on, the S&P 500 index was also up 0.95%, after losing for four consecutive days. The broad market index also registered the best-performing day since Jul 23. The Nasdaq Composite also rose 1.02% on the same day.

- Zacks

The small-cap centric index, the Russell 2000, outperformed by gaining 1.48% on Sep 22. This upside is being largely aided by the small-cap companies that are closely tied to the U.S. economy and are, therefore, well positioned to outshine when the economy improves.

Let’s discuss the factors keeping investors optimistic and creating a favorable environment for parking money in small-cap ETFs in details:

The FDA has approved emergency use of a booster dose of the Pfizer Inc. (PFE) and BioNTech SE (BNTX) COVID-19 vaccine. President Joe Biden has also outlined a very effective plan to accelerate the vaccination rate and control the coronavirus outbreak. He has made it mandatory for the federal employees to get the COVID-19 vaccination, per a CNBC article. The Biden government will also issue guidelines to the Labor Department for imposing vaccine mandates for employers with more than 100 employees or run weekly tests.

The latest retail sales data has pleasantly surprised investors. The metric inched up 0.7% sequentially in August 2021 against the market expectations of a 0.8% decline, per a CNBC article. Online retail sales rose 5.3% last month after dipping 4.6% in July, per a Reuters article. There was an increase in the sales at clothing stores as well as for the building material and furniture in the previous month. Encouragingly, the core retail sales rebounded 2.5% in August from a downward revision of 1.9% in July, according to the Reuters article. The metric highlights the spending component of GDP.

The U.S. consumer sentiment also marginally improved despite the heightening concerns about the surging coronavirus cases and the rising inflationary levels. The University of Michigan’s preliminary consumer sentiment has inched up to 71 in September from 70.3 last month, per a BloombergQuint article.

The latest ISM Manufacturing Purchasing Managers' Index (PMI) data for the United States paints a rosy picture for the industrial sector. The metric rose to 59.9 in August from 59.5 in July and surpassed forecasts of 58.6, per a Reuters article. Any reading above 50% indicates an expansion in U.S. manufacturing activities. Notably, the manufacturing sector, which makes up 11.9% of the U.S. economy, saw the reading expanding for the 15th consecutive month.

Moreover, the Fed’s continued support with easy monetary policies and fiscal stimulus support are strengthening hopes of a rapid recovery from the pandemic-led slump. Commenting on  the Federal Reserve’s move, Peter Boockvar, chief investment officer at Bleakley Advisory Group has said that “While a taper announcement, maybe, is coming in November, that they didn’t do so today just reflects a still uber dovish committee,” according to a CNBC article.

Red-Hot Small-Cap ETFs to Consider

For investors looking to capitalize on this opportunity, the following small-cap ETFs could be strong pure plays:

Vanguard Small-Cap Growth ETF VBK

This fund follows the CRSP US Small Cap Growth Index. The product manages assets worth $16.21 billion, and charges 7 basis points (bps) in annual fees and expenses (read: Fed Likely to Remain Dovish: ETFs to Buy).

iShares Russell 2000 Growth ETF IWO

This fund tracks the Russell 2000 Growth Index and offers exposure to small-cap companies that have earnings growth expectations above the average rate relative to the market. The product manages assets worth $11.82 billion, and charges 24 bps in annual fees and expenses (read:  U.S. Dollar to Gain Ahead? ETFs to Gain/Lose).

iShares S&P Small-Cap 600 Growth ETF IJT

This product tracks the S&P SmallCap 600 Growth Index. It manages assets worth $6.15 billion, and charges 18 bps in annual fees and expenses.

SPDR S&P 600 SmallCap Growth ETF SLYG

This ETF follows the S&P SmallCap 600 Growth Index, which comprises stocks that exhibit the strongest growth characteristics based on sales growth, earnings change to price and momentum. The product manages assets worth $2.32 billion and charges 15 bps in annual fees and expenses.



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iShares Russell 2000 Growth ETF (IWO): ETF Research Reports

 

iShares S&P SmallCap 600 Growth ETF (IJT): ETF Research Reports

 

Vanguard SmallCap Growth ETF (VBK): ETF Research Reports

 

SPDR S&P 600 Small Cap Growth ETF (SLYG): ETF Research Reports

 

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Zacks Investment Research