The year 2020 has certainly been a chaotic and unpredictable year so far, marked by the coronavirus pandemic and U.S. elections. Meanwhile, Wall Street hugely surprised investors amid this roller-coaster ride of the year. With support from major tech players that showed resilience to the pandemic, the Nasdaq composite has gained around 42% year to date. The other major broad indices, Dow Jones Industrial Average and the S&P 500 have gained 5.6% and 14.2%, respectively, so far.

One area that strongly caught investors’ attention is the small-cap stocks outperforming the Dow and S&P 500 indices. Notably, the small-capitalization Russell 2,000 Index has risen 20% this year. In fact, the small-cap index touched another record high at the time of closing on Dec 23 for the 13th time this year. This upside is being largely led by small-cap companies that are closely tied to the U.S. economy and are therefore well-positioned to outperform when the economy improves.

Will the Rally Remain?

Major factors consistently working in favor of the Wall Street rally seem to fall in place this time as well. The Fed’s intention to keep supporting the economic recovery was indicated by its decision to not hike rates until 2023. It is worth noting here that low rates are particularly beneficial for the micro-cap stocks as it helps ramping up economic activities and boosting the domestically-focused companies. Moving on, the Fed’s stand on the inflation-related policies is expected to fuel the bullish sentiments.

Moreover, the chances of a divided Congress in the United States seem more likely wherein the Republicans can continue to control the Senate and the Democrats, the House. Due to this political gridlock, major and stringent changes in the corporate tax policies will be very difficult to be implemented in the medium term. Thus, easing worries regarding major policy changes are making the investing environment friendlier for market participants.

The beginning of inoculation process among people is highly buoying optimism. Notably, the two frontrunners in the COVID-vaccine race, namely Moderna (MRNA) and Pfizer/BioNTech already received the emergency use authorization from the FDA for their coronavirus vaccines. Going by a CNBC article, pertaining to its goal to immunize 20 million people in December, the United States administered 1,008,025 shots as of Dec 23 morning. Per the Centers for Disease Control and Prevention (CDC) data, the country shipped a total of 9,465,725 doses across its length and breadth (per a CNBC article).

It is important to note that investors are getting increasingly desperate for another round of fiscal stimulus with the renewed spike in coronavirus cases and the mounting of pandemic pressure on the economy.

Luckily, investors found a reason now to cheer for as Congress finally reached an agreement on a coronavirus stimulus package. However, the bill, which includes a fresh round of stimulus checks and additional unemployment sops, has been denied to be signed by the outgoing President Donald Trump, per the sources. Trump wants direct payments to be increased from $600 to $2,000, per a CNBC article. Meanwhile, at a pro-forma session on Dec 24, House Democrats are hoping for a unanimous approval of funds worth $2,000, according to a CNBC article.

Small-Cap Growth ETFs Performing Well

Against this bullish backdrop for small-cap growth ETFs, let’s take a look at some of the best performers in 2020, which have gained more than 30% year to date:

iShares Morningstar Small-Cap Growth ETF — up 48.4% year to date

The fund seeks to provide exposure to small public U.S. companies, earnings of which are expected to grow at an above-average rate relative to the market. With an AUM of $684.9 million, the fund charges a fee of 30 basis points (bps). It currently carries a Zacks ETF Rank #2 (Buy) with a Medium-risk outlook (read: 5 Best Small-Cap ETFs as Russell 2000 Tops S&P 500 YTD).

Vanguard Russell 2000 Growth ETF (VTWG Quick QuoteVTWG - Free Report) — up 38.6%

The fund seeks to track the performance of the Russell 2000 Growth Index. The index measures the performance of those Russell 2000 companies with higher price/book ratios and higher predicted and historical growth rates. VTWG has an AUM of $507.1 million and charges 15 bps in expense ratio. It presently carries a Zacks ETF Rank #2 with a High-risk outlook (read: Here's Why Growth ETFs are Ruling the 52-Week High Chart).

iShares Russell 2000 Growth ETF (IWO Quick QuoteIWO - Free Report) — up 38.5%

The fund seeks to track the investment results of an index composed of small-capitalization U.S. equities that exhibit growth characteristics. With an AUM of $11.77 billion, the fund charges a fee of 24 bps. It currently carries a Zacks ETF Rank #1 (Strong Buy) with a High-risk outlook (read: 5 Small-Cap ETFs Set to Explode on COVID-19 Vaccines).

Vanguard Small Cap Growth ETF (VBK Quick QuoteVBK - Free Report) — up 37.4%

The fund seeks to track the performance of the CRSP US Small Cap Growth Index. It has an AUM of $14.92 billion and charges 7 bps in expense ratio. The fund currently carries a Zacks ETF Rank #1 with a Medium-risk outlook (read: Small Cap ETFs Deliver Big Gains for Investors).

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