6 Smart-Beta Small-Cap ETFs To Pick If The Rally Softens

The U.S. small-cap space has exhibited an impressive rally this year with the Russell 2000, posting its 18th record close for the year on June 6. Small-cap fund iShares Russell 2000 ETF (IWMis up 5.2% in the past one month and 17.9% in the last one year. So far this year, IWM has advanced 7.9% while the S&P 500 is up 2.8% (as of Jun 7, 2018).

Though large-cap index S&P 500 started 2018 on a better footing than the Russell 2000, the game started changing from mid-March. President Trump’s protections agenda and the resultant trade war fears started weighing on large-cap stocks that have a considerable international exposure. And the domestically focused pint-sized stocks soared.

Since mid-March, there was no looking back for the Russell 2000 index, having outperformed its mid (Russell Midcap index) and large-cap (Russell 1000 index) counterparts for the third straight month through May (read: 5 Hottest Small-Cap ETFs of 2018).

Apart from its insulation from trade tensions, a fast-growing U.S. economy (compared with several other developed countries), a stronger greenback, a hawkish Fed, upbeat earnings and geopolitical tensions have favored the segment (read: Solid Small-Cap Earnings Put Spotlight on These Sector ETFs).

The tax reform is yet another tailwind to the segment as it is supposed to favor small-caps more. This is because companies in the Russell 2000 pay a higher median effective tax rate than the S&P 500, per Thomson Reuters. Now the question arises is how long the rally will continue (read: Why Leveraged Small-Cap ETFs Are Going Through the Roof).

Will the Rally Continue?

The question is coming because many of the tailwinds have been priced in at the current level. The co-chief investment strategist of PNC Financial have doubts on the small caps' record run. After such a strong rally, profit booking activity is also in the cards. Moreover, there is a glitch in the new tax law that can act as a deterrent to small-cap stocks.

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