3 Reasons To Play Small-Cap Value ETFs Over Growth Ones

Investors are waiting with bated breath for small caps to turn around this year and cash in on the newly signed tax cuts. So, it is quite likely that they will be eager to know which theme to pick now — growth, value or blend.

The tax bill cuts “the corporate rate from 35% to 21%, gives pass-through businesses like the Trump Organization a 20% tax deduction, raises the standard deduction, expands the child tax credit, and temporarily lowers individual rates across the board.”

Now, since small-caps have a higher median tax rate, corporate tax cuts should give big-time benefits to these stocks. Plus, consumers may save on tax payments which will result in higher tax savings and benefit small-cap stocks (read: Tax Bill: What ETF Investors Need to Know).

However, there are some drawbacks. The benefit of lower tax rates is likely to be outweighed by pricey valuations, chances of higher volatility and tighter credit conditions, by some analysts (read: Tax Reform: A Boon or Bane for Small-Cap ETFs?).

Against this backdrop, below we detail why small-cap value ETFs will do better than the growth ones this year.

More Domestically-Focused

As per Bloomberg,small-cap value is highly reliant on domestic growth as 80% of its market cap is concentrated on cyclical sectors such as industrials, discretionary and information technology (read: 3 Sector ETFs for 2018).

Since higher domestic consumption will likely drive the performance of small caps in 2018, it is better for investors to look at value stocks over growth. Bloomberg also indicated that specialty retail makes up about one-third of the small-cap value discretionary sector and has beaten even large-cap counterpart since mid-August.

Need for Value Quotient 

According to Bank of America Merrill Lynch, small caps normally lag at the end of bull markets. Small-cap stocks had an average negative alpha of 6% in the last six months of the past four bull markets.

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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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