5 Small-Cap ETFs Outperforming Russell 2000

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The small-cap space has been outperforming the large-cap brethren this year following an upbeat start to 2023 after suffering sharp losses last year. iShares Russell 2000 ETF (IWM - Free Report), the ultra-popular small-cap ETF, climbed 12.2% compared to a gain of 8.6% for the ultra-popular large-cap ETF, SPDR S&P 500 ETF Trust (SPY - Free Report).

While many ETFs have risen, we have highlighted five from the small-cap space that are on the forefront of the rally at midway first quarter. These include Invesco S&P SmallCap Consumer Discretionary ETF (PSCD - Free Report), Global X Lithium & Battery Tech ETF (LIT - Free Report), Invesco S&P SmallCap 600 Pure Value ETF (RZV - Free Report), Janus Henderson Small Cap Growth Alpha ETF (JSML - Free Report) and BlackRock Future Innovators ETF (BFTR - Free Report).


Inside the Outperformance

Inflation is easing and raised the prospects that the Fed could soon signal an end to its rate-hiking cycle. U.S. consumer prices unexpectedly fell for the first time in more than two-and-a-half years in December. Falling inflation will likely push consumer spending higher, resulting in a boost to small caps.

The Federal Reserve Chair Jerome Powell sees that inflation has started easing. At the latest meeting last week, the Fed lifted its benchmark interest rate by 0.25 percentage points to 4.5-4.75% and signaled that it could be closer to pausing its current rate-hiking campaign.

The latest round of economic data suggests that the economy is resilient, providing a huge boost to small-cap stocks. The United States added 223,000 jobs in December and the unemployment rate fell to 3.5%, matching a 50-decade low. Meanwhile, the U.S. economy expanded 2.1% annually in 2022 but is down from an annual growth of 5.9% recorded in 2021— the fastest rate since 1984. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 2.1% in the fourth quarter but slower than a 2.3% increase in the third quarter.

The growth came on the back of strong labor market resilience as well as excess savings accumulated during the COVID-19 pandemic. Given the resilient economy, the United States might avoid recession if the activity continues to grow this year.

As small-cap companies are more domestically tied, these are poised to outperform when the economy improves. Further, they 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. Market participants expect a global economic slowdown by the end of the year or next year. The International Monetary Fund warned that a third of the global economy will be in a recession this year as the United States, European Union and China will see their economies slow down.

Invesco S&P SmallCap Consumer Discretionary ETF (PSCD) – Up 18.5%

Invesco S&P SmallCap Consumer Discretionary ETF targets the small-cap segment of the broad consumer discretionary space by tracking the S&P SmallCap 600 Capped Consumer Discretionary Index. It holds 86 securities in its basket, with specialty retail taking the largest share at 36.9%, while household durables, and hotels, restaurants and leisure account for double-digit exposure each.

Invesco S&P SmallCap Consumer Discretionary ETF has attracted $26.6 million in AUM and charges 30 bps in annual fees. It trades in an average daily volume of about 1,000 shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

Global X Lithium & Battery Tech ETF (LIT) – Up 18.3%

Global X Lithium & Battery Tech ETF invests in companies throughout the lithium cycle, including mining, refinement and battery production, cutting across the traditional sectors and geographic definitions by tracking the Solactive Global Lithium Index. It holds 40 securities in its basket, with the Chinese firms taking the largest share at 37.9%, followed by the United States (23%) and Australia (11.3%).

Global X Lithium & Battery Tech ETF charges investors 75 bps in annual fees and has amassed $3.7 billion in AUM. It trades in an average daily volume of 542,000 shares.

Invesco S&P SmallCap 600 Pure Value ETF (RZV) – Up 15.9%

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 152 stocks in its basket, with key holdings in consumer discretionary, industrials, and financials.
 
Invesco S&P SmallCap 600 Pure Value ETF has AUM of $367.4 billion and trades in an average daily volume of 23,000 shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Janus Henderson Small Cap Growth Alpha ETF (JSML) – Up 15.7%

Janus Henderson Small Cap Growth Alpha ETF seeks to provide risk-adjusted outperformance by identifying top-tier small-cap companies with some of the strongest fundamentals that can deliver sustainable growth in a variety of market environments by tracking the Janus Henderson Small Cap Growth Alpha Index. It holds 191 stocks in its basket, with key holdings in information technology, healthcare, industrials and consumer discretionary.

Janus Henderson Small Cap Growth Alpha ETF has been able to manage assets worth $79.7 million and trades in a lower volume of 11,000 shares a day on average. It charges 30 bps in annual fees and has a Zacks ETF Rank #3.

BlackRock Future Innovators ETF (BFTR) – Up 15%

BlackRock Future Innovators ETF offers diversified exposure to innovative companies that may deliver growth and capital appreciation. It holds 55 securities, with information technology taking the largest share at 33.6%, while health care, consumer discretionary and industrials round off the next spots.

BlackRock Future Innovators ETF has accumulated $7.5 million in its asset base and charges 80 bps in annual fees. It trades in a paltry volume of 4,000 shares a day on average.


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