Bet On Small-Cap ETFs For Outperformance

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Amid the holiday season fervor, Wall Street looks set for solid gains. History shows that the holiday-shortened week is a treat for stock investors –– even those with low volumes. And small caps might outperform, given an improving economy, cheap valuation and a value tilt amid inflation fears and resurgence in COVID-19 cases outside the United States.

While there are several options to play the bullish trend, we have highlighted five ETFs that are among the popular choices in the space and have a solid Zacks Rank #2 (Buy), suggesting their outperformance in the coming months. These include iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ Vanguard Small-Cap ETF (VB - Free Report), Schwab U.S. Small-Cap ETF (SCHA - Free Report), Vanguard Russell 2000 ETF (VTWO - Free Report) and SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report).

A Favorable Period

According to Bespoke Investment Group, the Thanksgiving week has returned modest gains for stocks since 1945. Researchers say that since then, the entire week of Thanksgiving has averaged a 60-basis-point advance for the S&P 500, with the best returns coming on the Wednesday before the holiday and Black Friday, and the only decline on average on a Monday at the start of the week. Sam Stovall, the chief investment strategist at CFRA, also said the last five trading days of November have been traditionally positive since 1950. There is a two-thirds likelihood that the market is up the day before Thanksgiving, a 57% likelihood for an increase the day after Thanksgiving, and a 71% likelihood that it’s up on Monday.

While the broad market is expected to rally, small caps could have the edge, given their cheap valuation and pure domestic exposure. This is especially true as small caps have been beaten badly by the pandemic and have not risen according to the market rally this year, making them more desirable as the economic recovery gains traction. The small-cap corner of the stock market has been lagging the large caps this year, with a rally of 18% for the Russell 2000 Index compared with the S&P 500’s 24.7% increase.

Small caps, which are generally more cyclical stocks, tend to outperform when the economy is healthy and growing. Consumer confidence is stronger than expected, hiring has been picking up and wages are rising. While inflation is rising at the fastest pace in 30 years, retail sales remain robust. U.S. retail sales in October surged for the third consecutive month and have jumped the maximum since March. The wider reach of vaccinations and COVID-19 boosters has accelerated economic reopening, setting the stage for the stocks’ rally. Additionally, small caps perform better than the large caps if long-term interest rates rise more than short-term rates over the coming year, steepening the yield curve.

Further, the small-cap index has more of a value tilt, compared with the S&P 500’s mega-cap growth stocks. Moreover, the resurgence of COVID-19 cases in Europe prompted fresh lockdowns, thereby sparking fears of global recovery. Since the pint-sized stocks generate most of their revenues from the domestic market, they are considered safer and better plays if political issues or economic turmoil creep into the picture.

ETFs to Buy

iShares Core S&P Small-Cap ETF (IJR - Free Report)

iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. iShares Core S&P Small-Cap ETF holds 672 stocks in its basket with none accounting for more than 1.3% of assets. Financials, industrials, information technology, consumer discretionary, and healthcare are the top five sectors with double-digit exposure each.

iShares Core S&P Small-Cap ETF has AUM of $76.1 billion and trades in an average daily volume of 3.3 million shares. The product charges investors 6 bps in annual fees.

Vanguard Small-Cap ETF (VB - Free Report)

Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1527 stocks with none holding more than 0.4% of assets. Vanguard Small-Cap ETF is widely spread across various sectors with industrials, consumer discretionary, financials, information technology, and healthcare being the top-five.

Vanguard Small-Cap ETF has AUM of $51.4 billion and trades in solid average daily volume of about 441,000 shares. VB charges 5 bps in fees per year from investors.

Schwab U.S. Small-Cap ETF (SCHA - Free Report)
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,750 stocks in its basket. Each security accounts for less than 0.4% of the assets. Schwab U.S. Small-Cap ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer discretionary having double-digit exposure each.

Schwab U.S. Small-Cap ETF has AUM of $17.8 billion and sees solid volume of more than 366,000 shares a day. It has an expense ratio of 0.04%.

Vanguard Russell 2000 ETF (VTWO - Free Report)

Vanguard Russell 2000 ETF tracks the Russell 2000 Index, holding 2088 stocks in its basket with none making up for more than 0.6% of the assets. Vanguard Russell 2000 ETF is widely spread across various sectors with healthcare, financials, industrials, consumer discretionary, and information technology being the top five.

Vanguard Russell 2000 ETF has accumulated $7.1 billion in its asset base and trades in an average daily volume of 974,000 shares. The product charges 10 bps in annual fees.

SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report)

SPDR Portfolio S&P 600 Small Cap ETF follows the S&P Small Cap 600 Index, holding 601 stocks in its basket. None of the firms make up for more than 1% of assets. SPDR Portfolio S&P 600 Small Cap ETF is also widely spread out across sector with financials, industrials, information technology, consumer discretionary, and healthcare making double-digit exposure each.

SPDR Portfolio S&P 600 Small Cap ETF has been able to manage $4.7 billion in its asset base and trades in a good volume of 425,000 shares a day on average. SPSM charges 5 bps in annual fees.

Disclosure: 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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