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Leverage the Power of Utilities & Small-Caps With These ETFs
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As the three major bourses are hovering near record highs, investors are rotating to areas like utility and the small-caps, which are cheap and undervalued. These zones have outperformed in May.
The Utilities Select Sector SPDR Fund (XLU - Free Report) emerged as the top performer among the 11 SPDR ETFs tracking the S&P 500 sectors. It rose nearly 9% last month, logging its largest monthly gain since March 2022, according to FactSet data. Meanwhile, small-cap stocks, as tracked by the Russell 2000 Index, surpassed the S&P 500 and the Dow Jones with a 4.9% monthly gain. It was the small-cap’s best month since February.
Investors seeking to tap these hottest zones of the stock market could consider ETFs in these spaces. While there is a long list, we have highlighted the five most popular options from these zones. These include Utilities Select Sector SPDR Fund (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , iShares Core S&P Small-Cap ETF (IJR - Free Report) , iShares Russell 2000 ETF (IWM - Free Report) , and Vanguard Small-Cap ETF (VB - Free Report) .
Here, we have cited the reasons for their strong performance. The trend is likely to continue in the weeks ahead.
Utility
The utility sector, which tends to outperform when the economy is in a downturn, is making the most of the current volatility and uncertainty triggered by the timing of the Fed rate cuts, slowing economy and geopolitical tension. Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil (read: Here's Why Utility ETFs Are Scaling New Highs).
Additionally, rising demand for electricity driven by artificial intelligence chips and software has made the traditional defensive sector of the market most appealing.
Small-Caps
Small-cap stocks are also considered safer and better plays if political issues or economic turmoil creep into the picture, as the pint-sized stocks generate most of their revenues from the domestic market. The latest survey from the National Federation of Independent Business revealed that small business optimism rebounded 1.2 points from the lowest level since December 2012 to 89.7 in April.
Small-cap stocks seem attractively valued. According to the recent analysis by the firm’s senior US market strategist, Dave Sekera, “small-cap stocks trade at an 18% discount to fair value, making them the cheapest US asset class across the Morningstar Style Box.”
Further, the artificial intelligence (AI) craze holds the promise of ushering in fresh opportunities for growth. While mega-cap companies are leading the AI world, many small-cap stocks having huge potential in this field remain untapped. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030 (read: 5 ETFs Leading the Small-Cap Rally).
With an AUM of $14 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. It follows the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 65.9%, closely followed by multi utilities (25.9%). Utilities Select Sector SPDR charges 9 bps of annual fees and sees a heavy volume of 13.5 million shares, on average. It has a Zacks ETF Rank #3 (Hold).
Vanguard Utilities ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 65 securities in its basket, with none accounting for more than 12.4% share. About 62.4% of the portfolio is allocated to electric utilities, closely followed by multi utilities (25.3%). Vanguard Utilities ETF charges 10 bps in annual fees and sees a good volume of around 171,000 shares on average. It has AUM of $5.7 billion and a Zacks ETF Rank #3.
iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. It holds 681 stocks in its basket, with none accounting for more than 2% of the assets. Financials, industrials, consumer discretionary, information technology and healthcare are the top five sectors with double-digit exposure each. iShares Core S&P Small-Cap ETF has AUM of $78.5 billion and trades in an average daily volume of 3 million shares. The product charges investors 6 bps in annual fees.
iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $59 billion and an average daily volume of 27 million shares. iShares Russell 2000 ETF holds well-diversified 1,937 stocks in its basket and has key holdings in industrials, financials, information technology, healthcare and consumer discretionary. iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #2 (Buy) (read: ETFs Worth a Look on Russell Indexes' Shake-Up).
Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,417 stocks, with none holding more than 0.5% of assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five. Vanguard Small-Cap ETF has AUM of $55.3 billion and trades in a solid average daily volume of about 562,000 shares. VB charges 5 bps in fees per year from investors.
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Leverage the Power of Utilities & Small-Caps With These ETFs
As the three major bourses are hovering near record highs, investors are rotating to areas like utility and the small-caps, which are cheap and undervalued. These zones have outperformed in May.
The Utilities Select Sector SPDR Fund (XLU - Free Report) emerged as the top performer among the 11 SPDR ETFs tracking the S&P 500 sectors. It rose nearly 9% last month, logging its largest monthly gain since March 2022, according to FactSet data. Meanwhile, small-cap stocks, as tracked by the Russell 2000 Index, surpassed the S&P 500 and the Dow Jones with a 4.9% monthly gain. It was the small-cap’s best month since February.
Investors seeking to tap these hottest zones of the stock market could consider ETFs in these spaces. While there is a long list, we have highlighted the five most popular options from these zones. These include Utilities Select Sector SPDR Fund (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , iShares Core S&P Small-Cap ETF (IJR - Free Report) , iShares Russell 2000 ETF (IWM - Free Report) , and Vanguard Small-Cap ETF (VB - Free Report) .
Here, we have cited the reasons for their strong performance. The trend is likely to continue in the weeks ahead.
Utility
The utility sector, which tends to outperform when the economy is in a downturn, is making the most of the current volatility and uncertainty triggered by the timing of the Fed rate cuts, slowing economy and geopolitical tension. Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil (read: Here's Why Utility ETFs Are Scaling New Highs).
Additionally, rising demand for electricity driven by artificial intelligence chips and software has made the traditional defensive sector of the market most appealing.
Small-Caps
Small-cap stocks are also considered safer and better plays if political issues or economic turmoil creep into the picture, as the pint-sized stocks generate most of their revenues from the domestic market. The latest survey from the National Federation of Independent Business revealed that small business optimism rebounded 1.2 points from the lowest level since December 2012 to 89.7 in April.
Small-cap stocks seem attractively valued. According to the recent analysis by the firm’s senior US market strategist, Dave Sekera, “small-cap stocks trade at an 18% discount to fair value, making them the cheapest US asset class across the Morningstar Style Box.”
Further, the artificial intelligence (AI) craze holds the promise of ushering in fresh opportunities for growth. While mega-cap companies are leading the AI world, many small-cap stocks having huge potential in this field remain untapped. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030 (read: 5 ETFs Leading the Small-Cap Rally).
ETFs in Focus
Utilities Select Sector SPDR (XLU - Free Report)
With an AUM of $14 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. It follows the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 65.9%, closely followed by multi utilities (25.9%). Utilities Select Sector SPDR charges 9 bps of annual fees and sees a heavy volume of 13.5 million shares, on average. It has a Zacks ETF Rank #3 (Hold).
Vanguard Utilities ETF (VPU - Free Report)
Vanguard Utilities ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 65 securities in its basket, with none accounting for more than 12.4% share. About 62.4% of the portfolio is allocated to electric utilities, closely followed by multi utilities (25.3%). Vanguard Utilities ETF charges 10 bps in annual fees and sees a good volume of around 171,000 shares on average. It has AUM of $5.7 billion and a Zacks ETF Rank #3.
iShares Core S&P Small-Cap ETF (IJR - Free Report)
iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. It holds 681 stocks in its basket, with none accounting for more than 2% of the assets. Financials, industrials, consumer discretionary, information technology and healthcare are the top five sectors with double-digit exposure each. iShares Core S&P Small-Cap ETF has AUM of $78.5 billion and trades in an average daily volume of 3 million shares. The product charges investors 6 bps in annual fees.
iShares Russell 2000 ETF (IWM - Free Report)
iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $59 billion and an average daily volume of 27 million shares. iShares Russell 2000 ETF holds well-diversified 1,937 stocks in its basket and has key holdings in industrials, financials, information technology, healthcare and consumer discretionary. iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #2 (Buy) (read: ETFs Worth a Look on Russell Indexes' Shake-Up).
Vanguard Small-Cap ETF (VB - Free Report)
Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,417 stocks, with none holding more than 0.5% of assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five. Vanguard Small-Cap ETF has AUM of $55.3 billion and trades in a solid average daily volume of about 562,000 shares. VB charges 5 bps in fees per year from investors.