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5 Small-Cap ETFs at the Forefront of the Latest Rally
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Small-cap stocks have staged a strong comeback buoyed by the Trump trade resurgence and the growing expectations of the Fed cutting rates in September. The small-cap Russell 2000 Index, which has significantly lagged this year, has been on its longest winning streak since April 2000. It registered gains of more than 1% for the fifth consecutive day. The index gained 9.1% over the past week versus a decline of 0.8% for the S&P 500 (read: Here's Why You Should Bet on Beaten-Down Small-Cap ETFs).
We have highlighted five ETFs from the space that are at the forefront of the market rally over the past week. These are Invesco KBW Regional Banking ETF (KBWR - Free Report) , Invesco NASDAQ Future Gen 200 ETF (QQQS - Free Report) , iShares US Small Cap Value Factor ETF (SVAL - Free Report) , WisdomTree U.S. SmallCap Fund (EES - Free Report) and ALPS Medical Breakthroughs ETF (SBIO - Free Report) .
Here, we have highlighted some solid reasons as to why the small-cap space is outperforming.
Rate Cut Bets
Rate cut bets for September have ramped up following the latest inflation data and Fed Chairman Jerome Powell’s recent hints, resulting in a spike in small-cap stocks. Inflation in June saw the first monthly drop since 2020 and the slowest annual price gain since March 2021. Meanwhile, Powell said the Fed wouldn’t wait for inflation to get to its 2% target before it began cutting rates. According to the CME FedWatch tool, traders now see 100% chance of the Fed lowering rates in September.
The 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.
Trump Trade
Chances of Donald Trump winning in November have risen steadily in recent weeks, making small-cap stocks attractive to investors. This is especially true as lowering taxes and regulations will likely boost domestic stocks, including small caps.
Attractive Valuation
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.
AI Boost
The artificial intelligence (AI) craze holds the promise of ushering in fresh growth opportunities in every corner of the sector. 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).
International Headwinds
Further, small-cap stocks are considered safer and better plays if political issues or economic turmoil creep into the picture. This is because 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 are driving the appeal for small-cap stocks.
Invesco KBW Regional Banking ETF offers exposure to publicly traded U.S. regional banking and thrift companies by tracking the KBW Nasdaq Regional Banking Index. It holds 51 stocks in its basket, with none accounting for more than 4% of assets.
Invesco KBW Regional Banking ETF is a relatively less popular and less liquid option in the space, with AUM of $53.8 million and an average daily volume of 4,000 shares. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
Invesco NASDAQ Future Gen 200 ETF (QQQS - Free Report) – Up 14.6%
Invesco NASDAQ Future Gen 200 ETF tracks the Nasdaq Innovators Completion Cap Index, which consists of the companies within the Nasdaq Composite Index, excluding those companies included in the Nasdaq-100 Index and Nasdaq Next Generation 100 Index. It holds 205 stocks in its basket with each accounting for less than 1% share.
Invesco NASDAQ Future Gen 200 ETF has gathered $8.9 million in its asset base and charges 20 bps in annual fees. It trades in an average daily volume of 3,000 shares and has a Zacks ETF Rank #3 (Hold).
iShares US Small Cap Value Factor ETF (SVAL - Free Report) – Up 13.4%
iShares US Small Cap Value Factor ETF offers exposure to the historically rewarded value and size factors through 250 U.S. small-cap companies with prominent value characteristics. It follows the Russell 2000 Focused Value Select Index and holds 272 stocks in its basket. Financials is the top sector with a 48.8% share in the portfolio, followed by 13.2% in industrials, 12% in consumer discretionary and 10.8% in energy.
iShares US Small Cap Value Factor ETF has AUM of $73.4 million and trades in a volume of 8,000 shares a day on average. It charges 20 bps in annual fees.
WisdomTree U.S. SmallCap Fund (EES - Free Report) – Up 11.8%
WisdomTree U.S. SmallCap Fund targets earnings-generating small-cap companies by tracking the WisdomTree U.S. SmallCap Index. Holding 892 stocks in its basket, it provides a nice balance across various securities as each firm holds less than 1% share in the basket. From a sector look, financials takes the largest share at 27.3% of the assets while consumer discretionary, industrials, and information technology round off the next spots with double-digit exposure each (read: Q2 Earnings on Track to Reach Record Highs: ETFs to Tap).
WisdomTree U.S. SmallCap Fund has amassed $618 million in its asset base and sees a moderate volume of around 31,000 shares per day. It charges 38 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
ALPS Medical Breakthroughs ETF (SBIO - Free Report) – Up 11.7%
ALPS Medical Breakthroughs ETF provides exposure to small- and mid-cap stocks of biotechnology companies that have one or more drugs in either Phase II or Phase III of the FDA clinical trials by tracking S-Network Medical Breakthroughs Index. It holds 96 securities in its basket.
ALPS Medical Breakthroughs ETF charges 50 bps in fees per year from its investors and trades in a moderate average daily volume of about 14,000 shares. It has AUM of $119.9 million in its asset base and currently has a Zacks ETF Rank #5 (Strong Sell).
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5 Small-Cap ETFs at the Forefront of the Latest Rally
Small-cap stocks have staged a strong comeback buoyed by the Trump trade resurgence and the growing expectations of the Fed cutting rates in September. The small-cap Russell 2000 Index, which has significantly lagged this year, has been on its longest winning streak since April 2000. It registered gains of more than 1% for the fifth consecutive day. The index gained 9.1% over the past week versus a decline of 0.8% for the S&P 500 (read: Here's Why You Should Bet on Beaten-Down Small-Cap ETFs).
We have highlighted five ETFs from the space that are at the forefront of the market rally over the past week. These are Invesco KBW Regional Banking ETF (KBWR - Free Report) , Invesco NASDAQ Future Gen 200 ETF (QQQS - Free Report) , iShares US Small Cap Value Factor ETF (SVAL - Free Report) , WisdomTree U.S. SmallCap Fund (EES - Free Report) and ALPS Medical Breakthroughs ETF (SBIO - Free Report) .
Here, we have highlighted some solid reasons as to why the small-cap space is outperforming.
Rate Cut Bets
Rate cut bets for September have ramped up following the latest inflation data and Fed Chairman Jerome Powell’s recent hints, resulting in a spike in small-cap stocks. Inflation in June saw the first monthly drop since 2020 and the slowest annual price gain since March 2021. Meanwhile, Powell said the Fed wouldn’t wait for inflation to get to its 2% target before it began cutting rates. According to the CME FedWatch tool, traders now see 100% chance of the Fed lowering rates in September.
The 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.
Trump Trade
Chances of Donald Trump winning in November have risen steadily in recent weeks, making small-cap stocks attractive to investors. This is especially true as lowering taxes and regulations will likely boost domestic stocks, including small caps.
Attractive Valuation
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.
AI Boost
The artificial intelligence (AI) craze holds the promise of ushering in fresh growth opportunities in every corner of the sector. 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).
International Headwinds
Further, small-cap stocks are considered safer and better plays if political issues or economic turmoil creep into the picture. This is because 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 are driving the appeal for small-cap stocks.
ETFs Riding High
Invesco KBW Regional Banking ETF (KBWR - Free Report) – Up 15%
Invesco KBW Regional Banking ETF offers exposure to publicly traded U.S. regional banking and thrift companies by tracking the KBW Nasdaq Regional Banking Index. It holds 51 stocks in its basket, with none accounting for more than 4% of assets.
Invesco KBW Regional Banking ETF is a relatively less popular and less liquid option in the space, with AUM of $53.8 million and an average daily volume of 4,000 shares. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
Invesco NASDAQ Future Gen 200 ETF (QQQS - Free Report) – Up 14.6%
Invesco NASDAQ Future Gen 200 ETF tracks the Nasdaq Innovators Completion Cap Index, which consists of the companies within the Nasdaq Composite Index, excluding those companies included in the Nasdaq-100 Index and Nasdaq Next Generation 100 Index. It holds 205 stocks in its basket with each accounting for less than 1% share.
Invesco NASDAQ Future Gen 200 ETF has gathered $8.9 million in its asset base and charges 20 bps in annual fees. It trades in an average daily volume of 3,000 shares and has a Zacks ETF Rank #3 (Hold).
iShares US Small Cap Value Factor ETF (SVAL - Free Report) – Up 13.4%
iShares US Small Cap Value Factor ETF offers exposure to the historically rewarded value and size factors through 250 U.S. small-cap companies with prominent value characteristics. It follows the Russell 2000 Focused Value Select Index and holds 272 stocks in its basket. Financials is the top sector with a 48.8% share in the portfolio, followed by 13.2% in industrials, 12% in consumer discretionary and 10.8% in energy.
iShares US Small Cap Value Factor ETF has AUM of $73.4 million and trades in a volume of 8,000 shares a day on average. It charges 20 bps in annual fees.
WisdomTree U.S. SmallCap Fund (EES - Free Report) – Up 11.8%
WisdomTree U.S. SmallCap Fund targets earnings-generating small-cap companies by tracking the WisdomTree U.S. SmallCap Index. Holding 892 stocks in its basket, it provides a nice balance across various securities as each firm holds less than 1% share in the basket. From a sector look, financials takes the largest share at 27.3% of the assets while consumer discretionary, industrials, and information technology round off the next spots with double-digit exposure each (read: Q2 Earnings on Track to Reach Record Highs: ETFs to Tap).
WisdomTree U.S. SmallCap Fund has amassed $618 million in its asset base and sees a moderate volume of around 31,000 shares per day. It charges 38 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
ALPS Medical Breakthroughs ETF (SBIO - Free Report) – Up 11.7%
ALPS Medical Breakthroughs ETF provides exposure to small- and mid-cap stocks of biotechnology companies that have one or more drugs in either Phase II or Phase III of the FDA clinical trials by tracking S-Network Medical Breakthroughs Index. It holds 96 securities in its basket.
ALPS Medical Breakthroughs ETF charges 50 bps in fees per year from its investors and trades in a moderate average daily volume of about 14,000 shares. It has AUM of $119.9 million in its asset base and currently has a Zacks ETF Rank #5 (Strong Sell).