A Spread Of Small-Cap ETFs Touching New Heights

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Amid bets of faster-than-expected economic recovery, small-caps have been outperforming this year with the Russell 2000 Index having gained 18.7%. In comparison, the S&P 400 Mid Cap Index and the S&P 500 Index are up 15.3% and 4.8%, respectively.

Continued progress in the development of more COVID-19 vaccines, rapid vaccine rollout, reopening of the economy as well as new stimulus are fueling growth in the stock market. The combination of all these factors led to pent-up demand, resulting in higher demand for all types of products and services in the economy. President Joe Biden last week signed one of the largest U.S. fiscal $1.9 trillion stimulus bills into law.

Additionally, the latest bouts of data have been encouraging, infusing optimism into economic growth. Consumer sentiment as depicted by the University of Michigan jumped to a one-year high in early March as more vaccines and fiscal relief boosted the economic outlook. The United States added 379,000 jobs — the highest since October — in February, while unemployment fell to 6.2%. U.S. manufacturing activity increased to a three-year high last month with acceleration in new orders. Consumer spending rose the most in seven months in January while construction spending surged to a record high, boosted by strong private and public outlays. Strong corporate earnings also bode well for economic growth.

As small-cap companies are closely tied to the U.S. economy, these are poised to outperform when the economy improves. These pint-sized stocks generate most of their revenues from the domestic market, making them great choices during an uptrend.

Further, the Fed has pledged to maintain its accommodative stance and will continue to buy $120 billion in Treasury and mortgage-backed securities per month. A low interest rate bodes well for small-cap stocks as it pushes up economic activities and results in higher spending, thus boosting the domestically focused companies.

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