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Small-cap stocks, as indicated by the Russell 2000 Index, had the best December so far and the best month versus the large-cap counterparts since February 2000. This reflects an abrupt turnaround from their sluggish performance through much of 2023. However, the strong rally fizzled at the start of 2024 amid the broad market turbulence. But this seems to be a good entry point, given the growing optimism among U.S. small-business owners.

The latest survey from the National Federation of Independent Business revealed that the small business optimism index rose 1.3 points to 91.9 in December — the strongest reading since July. Improving credit conditions and sales outlook led to the rise.

Given the solid momentum in the space, we have highlighted a few top-ranked ETFs that outperformed last month and could be better plays going forward. These are SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report), Vanguard S&P Small-Cap 600 ETF (VIOO - Free Report), iShares Core S&P Small-Cap ETF (IJR - Free Report), JPMorgan BetaBuilders U.S. Small Cap Equity ETF (BBSC - Free Report) and Invesco S&P SmallCap Momentum ETF (XSMO - Free Report).

The Fed’s dovish outlook has made future credit conditions better. The central bank penciled in three rate cuts for 2024 as inflation is easing and the economy is holding up better. This shift in its monetary policy aims to support a stable economic environment without triggering a recession or a significant rise in unemployment.

Meanwhile, recent indicators suggest that economic activity has been expanding at a moderate pace, buoyed by robust consumer spending, strong job gains and a low unemployment rate. As small-cap companies are more domestically tied, these are poised to outperform when the economy improves.

Additionally, small-cap stocks are well insulated from international headwinds, including the ongoing Middle East tensions. They are considered safe and better plays if any political issue or economic turmoil creeps into the picture. Further, the strength of the U.S. dollar, which makes domestic goods more expensive overseas, also supported the small-cap surge.

ETFs in Focus

We have profiled the abovementioned ETFs here:

SPDR Portfolio S&P 600 Small Cap ETF (SPSM) – Up 6%

SPDR Portfolio S&P 600 Small Cap ETF follows the S&P Small Cap 600 Index, holding 605 stocks in its basket. None of the firms make up for more than 1% of the assets. SPDR Portfolio S&P 600 Small Cap ETF is also widely spread across sectors with financials, industrials, consumer discretionary and information technology having double-digit exposure each.

SPDR Portfolio S&P 600 Small Cap ETF has been able to manage $9.6 billion in its asset base and trades in a good volume of 1.8 million shares a day on average. SPSM charges 3 bps in annual fees and has a Zacks ETF Rank #2.

Vanguard S&P Small-Cap 600 ETF (VIOO) – Up 6%

With AUM of $2.5 billion, Vanguard S&P Small-Cap 600 ETF tracks the S&P Small-Cap 600 Index and holds 605 stocks in its basket. It charges 10 bps in annual fees and trades in an average daily volume of 170,000 shares. Industrials, consumer discretionary, financials and information technology are the top four sectors with a double-digit allocation each.

Vanguard S&P Small-Cap 600 ETF has a Zacks ETF Rank #2 with a Medium risk outlook.

iShares Core S&P Small-Cap ETF (IJR) – Up 5.9%

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 664 stocks in its basket, with none accounting for more than 0.9% of the assets. Financials, industrials, consumer discretionary and information technology are the top four sectors with double-digit exposure each.

iShares Core S&P Small-Cap ETF is the largest and most popular ETF in the small-cap space, with AUM of $74.7 billion and an average daily volume of 5 million shares. The product charges investors 6 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

JPMorgan BetaBuilders U.S. Small Cap Equity ETF (BBSC) – Up 5.6%

JPMorgan BetaBuilders U.S. Small Cap Equity ETF provides exposure to the small-cap U.S. equity market using an indexed approach. It follows the Morningstar US Small Cap Target Market Exposure Extended Index and holds 840 stocks in its basket. JPMorgan BetaBuilders U.S. Small Cap Equity ETF has key holdings in financials, industrials, consumer discretionary, health care, and technology.

JPMorgan BetaBuilders U.S. Small Cap Equity ETF has AUM of $856.1 million and trades in average daily volume of 21,000 shares. It charges 9 bps in fees per year and has a Zacks ETF Rank #1 (Strong Buy).

Invesco S&P SmallCap Momentum ETF (XSMO) – Up 13.8%

Invesco S&P SmallCap Momentum ETF offers exposure to companies in the S&P SmallCap 600 Index having the highest “momentum scores.” It tracks the tracking the S&P Smallcap 600 Momentum Index, holding 113 stocks in its basket.

Invesco S&P SmallCap Momentum ETF has gathered $268 million in its asset base and charges 39 bps in annual fees. The fund trades in an average daily volume of 55,000 shares and has a Zacks ETF Rank #2.

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