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Here's Why You Should Bet on Beaten-Down Small-Cap ETFs
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The small-cap space has regained momentum as expectations of the Fed cutting rates anytime soon increased following the latest inflation data. Investors moved out from the hot technology sector into beaten-down small-cap stocks in anticipation that the rate cuts would improve conditions for these companies.
The small-cap Russell 2000 Index, which has significantly lagged this year, jumped 3.4% to a more than three-month high on Jun 11. As such, investors should take advantage of the beaten-down prices. For them, we have highlighted five solid ETF picks that were in red this year but are expected to rebound given the current market sentiments and a favorable Zacks ETF Rank #3 (Hold). These are Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) , Invesco S&P SmallCap 600 Pure Value ETF (RZV - Free Report) , Invesco Russell 2000 Dynamic Multifactor ETF (OMFS - Free Report) , Roundhill Acquirers Deep Value ETF (DEEP - Free Report) and SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) .
Inside the Latest Momentum
Inflation in the United States cooled down in June for the third consecutive month. The Consumer Price Index rose just 3% year over year last month, down from an annual growth of 3.3% in May. On a monthly basis, the price declined 0.1% from May’s flat reading. This marks the first monthly drop in inflation since 2020 and the slowest annual price gain since March 2021.
The slew of other latest data, which signal a slowdown in the world's largest economy, also supported the rate cut bets. Following the encouraging inflation data, markets priced in a roughly 89% chance that the Fed will begin to cut rates at its September meeting, up from 75% a day prior, according to data from the CME Group. This deepened the market’s confidence that the Fed would begin cutting interest rates in September, resulting in a spike in small-cap stocks (read: September Rate Cut Bets Make These ETFs Attractive).
This is especially true, as these pint-sized companies have a higher level of debt and lower rates generally lead to reduced borrowing costs. This helps small businesses to expand their operations more easily and results in increased profitability. This, in turn, stimulates economic growth. As small-cap companies are more domestically tied, these are poised to outperform when the economy improves.
Additionally, small-cap stocks are attractively valued at current levels compared to large-cap cousins. According to Yardeni Research, small-cap stocks traded at a forward price-earnings ratio of about 14 as of Jun 28 compared to about 21 for large-cap stocks, the largest gap since the tech bubble of the late 1990s.
Further, small-cap stocks are 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. Escalating tensions in the Middle East, the ongoing Russia-Ukraine war and the forthcoming U.S. presidential election are driving the appeal for small-cap stocks.
Moreover, the artificial intelligence (AI) craze holds the promise of ushering in fresh growth opportunities. 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 ETF Predictions for the Second Half of 2024).
ETFs to Consider
Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) – Down 11.2% YTD
Pacer US Small Cap Cash Cows 100 ETF is a strategy-driven ETF that aims to provide capital appreciation over time by screening the S&P SmallCap 600 Index for the top 100 companies based on free cash flow yield. CALF tracks the Pacer US Small Cap Cash Cows Index and holds 102 stocks in its basket. Consumer discretionary takes the top spot at 28.8% of the assets, followed by industrials (20.4%) and energy (13.2%).
The fund has amassed $8.6 billion in its asset base and trades in an average daily volume of 2 million shares. It charges 59 bps in annual fees.
Invesco S&P SmallCap 600 Pure Value ETF (RZV - Free Report) – Down 8.1% YTD
Invesco S&P SmallCap 600 Pure Value ETF offers exposure to the stocks of companies that exhibit strong value characteristics by tracking the S&P SmallCap 600 Pure Value Index. It holds 140 stocks in its basket, with key holdings in financials, consumer discretionary and industrials sectors.
Invesco S&P SmallCap 600 Pure Value ETF has AUM of $227.5 million and trades in an average daily volume of 11,000 shares. It charges 35 bps in annual fees.
Invesco Russell 2000 Dynamic Multifactor ETF (OMFS - Free Report) – Down 7.8% YTD
Invesco Russell 2000 Dynamic Multifactor ETF follows the Russell 2000 Invesco Dynamic Multifactor Index, which uses a rules-based approach that re-weights small-cap securities of the Russell 2000 Index according to economic cycles and market conditions, reflected by expansion, slowdown, contraction, or recovery. It holds a broad basket of 683 stocks with double-digit exposure in sectors like financials, industrials and information technology.
Invesco Russell 2000 Dynamic Multifactor ETF has accumulated $297.7 million in its asset base and charges 39 bps in annual fees. It trades in an average daily volume of 55,000 shares.
Roundhill Acquirers Deep Value ETF (DEEP - Free Report) – Down 6.9% YTD
Roundhill Acquirers Deep Value ETF is designed to offer retail and institutional investors exposure to deeply undervalued stock, seeking to provide investment results that measure the performance of the Acquirers Deep Value Index. It holds 100 stocks in its basket, with key holdings in consumer discretionary, industrials and financials sectors.
Roundhill Acquirers Deep Value ETF has amassed $33.3 million in its asset base while trading in an average daily volume of 1,000 shares. It charges 80 bps in annual fees.
SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) – Down 5.1% YTD
SPDR S&P 600 Small Cap Value ETF targets the stocks that exhibit the strongest value characteristics based on book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio. It tracks the S&P SmallCap 600 Value Index and holds 462 stocks in its basket. SLYV is widely spread across sectors, with financials, industrials and consumer discretionary making up for a double-digit exposure each.
SPDR S&P 600 Small Cap Value ETF has AUM of $3.6 billion while trading in a lower volume of 159,000 shares a day on average. It charges 15 bps in annual fees.
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Here's Why You Should Bet on Beaten-Down Small-Cap ETFs
The small-cap space has regained momentum as expectations of the Fed cutting rates anytime soon increased following the latest inflation data. Investors moved out from the hot technology sector into beaten-down small-cap stocks in anticipation that the rate cuts would improve conditions for these companies.
The small-cap Russell 2000 Index, which has significantly lagged this year, jumped 3.4% to a more than three-month high on Jun 11. As such, investors should take advantage of the beaten-down prices. For them, we have highlighted five solid ETF picks that were in red this year but are expected to rebound given the current market sentiments and a favorable Zacks ETF Rank #3 (Hold). These are Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) , Invesco S&P SmallCap 600 Pure Value ETF (RZV - Free Report) , Invesco Russell 2000 Dynamic Multifactor ETF (OMFS - Free Report) , Roundhill Acquirers Deep Value ETF (DEEP - Free Report) and SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) .
Inside the Latest Momentum
Inflation in the United States cooled down in June for the third consecutive month. The Consumer Price Index rose just 3% year over year last month, down from an annual growth of 3.3% in May. On a monthly basis, the price declined 0.1% from May’s flat reading. This marks the first monthly drop in inflation since 2020 and the slowest annual price gain since March 2021.
The slew of other latest data, which signal a slowdown in the world's largest economy, also supported the rate cut bets. Following the encouraging inflation data, markets priced in a roughly 89% chance that the Fed will begin to cut rates at its September meeting, up from 75% a day prior, according to data from the CME Group. This deepened the market’s confidence that the Fed would begin cutting interest rates in September, resulting in a spike in small-cap stocks (read: September Rate Cut Bets Make These ETFs Attractive).
This is especially true, as these pint-sized companies have a higher level of debt and lower rates generally lead to reduced borrowing costs. This helps small businesses to expand their operations more easily and results in increased profitability. This, in turn, stimulates economic growth. As small-cap companies are more domestically tied, these are poised to outperform when the economy improves.
Additionally, small-cap stocks are attractively valued at current levels compared to large-cap cousins. According to Yardeni Research, small-cap stocks traded at a forward price-earnings ratio of about 14 as of Jun 28 compared to about 21 for large-cap stocks, the largest gap since the tech bubble of the late 1990s.
Further, small-cap stocks are 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. Escalating tensions in the Middle East, the ongoing Russia-Ukraine war and the forthcoming U.S. presidential election are driving the appeal for small-cap stocks.
Moreover, the artificial intelligence (AI) craze holds the promise of ushering in fresh growth opportunities. 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 ETF Predictions for the Second Half of 2024).
ETFs to Consider
Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) – Down 11.2% YTD
Pacer US Small Cap Cash Cows 100 ETF is a strategy-driven ETF that aims to provide capital appreciation over time by screening the S&P SmallCap 600 Index for the top 100 companies based on free cash flow yield. CALF tracks the Pacer US Small Cap Cash Cows Index and holds 102 stocks in its basket. Consumer discretionary takes the top spot at 28.8% of the assets, followed by industrials (20.4%) and energy (13.2%).
The fund has amassed $8.6 billion in its asset base and trades in an average daily volume of 2 million shares. It charges 59 bps in annual fees.
Invesco S&P SmallCap 600 Pure Value ETF (RZV - Free Report) – Down 8.1% YTD
Invesco S&P SmallCap 600 Pure Value ETF offers exposure to the stocks of companies that exhibit strong value characteristics by tracking the S&P SmallCap 600 Pure Value Index. It holds 140 stocks in its basket, with key holdings in financials, consumer discretionary and industrials sectors.
Invesco S&P SmallCap 600 Pure Value ETF has AUM of $227.5 million and trades in an average daily volume of 11,000 shares. It charges 35 bps in annual fees.
Invesco Russell 2000 Dynamic Multifactor ETF (OMFS - Free Report) – Down 7.8% YTD
Invesco Russell 2000 Dynamic Multifactor ETF follows the Russell 2000 Invesco Dynamic Multifactor Index, which uses a rules-based approach that re-weights small-cap securities of the Russell 2000 Index according to economic cycles and market conditions, reflected by expansion, slowdown, contraction, or recovery. It holds a broad basket of 683 stocks with double-digit exposure in sectors like financials, industrials and information technology.
Invesco Russell 2000 Dynamic Multifactor ETF has accumulated $297.7 million in its asset base and charges 39 bps in annual fees. It trades in an average daily volume of 55,000 shares.
Roundhill Acquirers Deep Value ETF (DEEP - Free Report) – Down 6.9% YTD
Roundhill Acquirers Deep Value ETF is designed to offer retail and institutional investors exposure to deeply undervalued stock, seeking to provide investment results that measure the performance of the Acquirers Deep Value Index. It holds 100 stocks in its basket, with key holdings in consumer discretionary, industrials and financials sectors.
Roundhill Acquirers Deep Value ETF has amassed $33.3 million in its asset base while trading in an average daily volume of 1,000 shares. It charges 80 bps in annual fees.
SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) – Down 5.1% YTD
SPDR S&P 600 Small Cap Value ETF targets the stocks that exhibit the strongest value characteristics based on book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio. It tracks the S&P SmallCap 600 Value Index and holds 462 stocks in its basket. SLYV is widely spread across sectors, with financials, industrials and consumer discretionary making up for a double-digit exposure each.
SPDR S&P 600 Small Cap Value ETF has AUM of $3.6 billion while trading in a lower volume of 159,000 shares a day on average. It charges 15 bps in annual fees.