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Small-cap stocks, as indicated by the Russell 2000 Index, have lagged their bigger peers so far this year. iShares Russell 2000 ETF (IWM - Free Report) is up 6.8% versus 18.5% gains in the S&P 500. The ETF IWM has been up 10.2% past year against 24.6% gains noticed in the S&P 500 (as of Friday).
And why not? Higher borrowing costs are weighing on the small caps’ capital expenditure, with the proportion of small businesses reporting capital outlays in the last six months falling 6 points to 52%, the lowest level since August 2022.
After such lackluster performance, can small caps turn around? Let’s delve a little deeper.
Improved Small-Business Confidence
U.S. small-business confidence rose to a six-month high in June, despite persistent inflationary pressure. The National Federation of Independent Business (NFIB) reported on Tuesday that its Small Business Optimism Index rose 1 point to 91.5 last month, the highest level since last December.
However, June marked the 30th successive month when the index remained below the 50-year average of 98 due to high inflation and rising borrowing costs. A net 22% of businesses planned to increase compensation in the next three months, up 4 points from May. The proportion of planning capital expenditure over the next six months remained unchanged at 23%.
Fed to Cut Rate At Least Once in Second Half?
Cues of cooling inflation raised hopes that the Fed may cut rates as early as September. There is high hope that the Fed might lower the rate to 5-5.25% in September, according to the CME FedWatch Tool.
Small-cap Stocks Immune to Geopolitical Risks
Small-cap stocks are considered domestically focused. These are 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 and the ongoing Russia-Ukraine war drive the appeal for small-cap stocks as these are exposed to global tensions.
What Does Small-cap Stocks Valuation Say?
Small-cap stocks seem cheap compared to their expensive large-cap counterparts. Per WSJ data, the Russell 2000 is currently trading at a P/E ratio of 28.05, slightly above the year-ago level of 26.10. In comparison, the S&P 500 Index is currently trading at a P/E ratio of 24.37, up from the year-ago level of 19.98.
But then, the Russell 2000 is trading at a discount to the Nasdaq 100. The Nasdaq 100 Index is trading at a P/E ratio of 32.72X, above the year-ago level of 31.67X, per Wall Street Journal. It shows that small caps are neither massively cheap nor overvalued.
ETFs in Focus
Here are a few small-cap U.S. ETFs that have topped the list in their segment. Investors can keep a close track of these ETFs.
iShares US Small Cap Value Factor ETF (SVAL - Free Report) – Up 4.6% past week
Avantis U.S Small Cap Equity ETF (AVSC - Free Report) – Up 4.4% past month
iShares Russell 2000 Growth ETF (IWO - Free Report) – Up 4.3% past month
JPMorgan BetaBuilders U.S. Small Cap Equity Fund (BBSC - Free Report) – Up 4.3% Past month
Bottom Line
The picture is yet to improve for the small-cap segment given the still-stressed operational background, valuation and momentum. Investors may wait for a better entry point to bet on the small-cap ETFs.
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Can Small-Cap ETFs Turn Around Ahead?
Small-cap stocks, as indicated by the Russell 2000 Index, have lagged their bigger peers so far this year. iShares Russell 2000 ETF (IWM - Free Report) is up 6.8% versus 18.5% gains in the S&P 500. The ETF IWM has been up 10.2% past year against 24.6% gains noticed in the S&P 500 (as of Friday).
And why not? Higher borrowing costs are weighing on the small caps’ capital expenditure, with the proportion of small businesses reporting capital outlays in the last six months falling 6 points to 52%, the lowest level since August 2022.
After such lackluster performance, can small caps turn around? Let’s delve a little deeper.
Improved Small-Business Confidence
U.S. small-business confidence rose to a six-month high in June, despite persistent inflationary pressure. The National Federation of Independent Business (NFIB) reported on Tuesday that its Small Business Optimism Index rose 1 point to 91.5 last month, the highest level since last December.
However, June marked the 30th successive month when the index remained below the 50-year average of 98 due to high inflation and rising borrowing costs. A net 22% of businesses planned to increase compensation in the next three months, up 4 points from May. The proportion of planning capital expenditure over the next six months remained unchanged at 23%.
Fed to Cut Rate At Least Once in Second Half?
Cues of cooling inflation raised hopes that the Fed may cut rates as early as September. There is high hope that the Fed might lower the rate to 5-5.25% in September, according to the CME FedWatch Tool.
Small-cap Stocks Immune to Geopolitical Risks
Small-cap stocks are considered domestically focused. These are 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 and the ongoing Russia-Ukraine war drive the appeal for small-cap stocks as these are exposed to global tensions.
What Does Small-cap Stocks Valuation Say?
Small-cap stocks seem cheap compared to their expensive large-cap counterparts. Per WSJ data, the Russell 2000 is currently trading at a P/E ratio of 28.05, slightly above the year-ago level of 26.10. In comparison, the S&P 500 Index is currently trading at a P/E ratio of 24.37, up from the year-ago level of 19.98.
But then, the Russell 2000 is trading at a discount to the Nasdaq 100. The Nasdaq 100 Index is trading at a P/E ratio of 32.72X, above the year-ago level of 31.67X, per Wall Street Journal. It shows that small caps are neither massively cheap nor overvalued.
ETFs in Focus
Here are a few small-cap U.S. ETFs that have topped the list in their segment. Investors can keep a close track of these ETFs.
iShares US Small Cap Value Factor ETF (SVAL - Free Report) – Up 4.6% past week
Avantis U.S Small Cap Equity ETF (AVSC - Free Report) – Up 4.4% past month
iShares Russell 2000 Growth ETF (IWO - Free Report) – Up 4.3% past month
JPMorgan BetaBuilders U.S. Small Cap Equity Fund (BBSC - Free Report) – Up 4.3% Past month
Bottom Line
The picture is yet to improve for the small-cap segment given the still-stressed operational background, valuation and momentum. Investors may wait for a better entry point to bet on the small-cap ETFs.