Contrary to popular believe, the Fed dove is still to fly far from the border of the U.S. economy. In its latest June meeting, the Fed remained accommodative and hinted at a slower rate hike trail when the step is actually taken. To add to this, the Fed slashed its projection for the benchmark interest rate for 2016 and 2017, though the guidance for the ongoing year was kept unchanged.

This indirectly promised investors a few more months of cheap money inflows. On the other hand, the U.S. economy is taking root. Fed officials even went on to say that the rebounding U.S. economy is strong enough to endure one or two rate hikes this year and insisted that the rate hike decision will be solely economic data-reliant.

The ‘’soft patch” of Q1 has disappeared with “moderate” economic growth momentum in Q2. The economy wrote a turnaround story with better-than-expected job growth data along with strong construction spending, automobile sales and housing numbers.
Some dampeners of Q1 including a harsh winter and strikes at the Western Coast ports will not be present in Q3, though a relatively stronger greenback (against a basket of currencies) might cause occasional threats to U.S. exports and the large-cap stocks.

This economic development set the stage for the small-cap growth ETFs outperformance. Small cap stocks are broadly leading the market higher this year and are comfortably surpassing their large cap cousins. The ultra-popular small cap ETF (IWM) is up 6.9% year to date (as of June 19, 2015) against 2.4% gains in SPDR S&P 500 ETF Trust (SPY - ETF report) (read: Can These Top-Ranked Small Cap Growth ETFs Win in 2015?).

This trend will likely continue in the coming quarter, presuming that a risk-on sentiment will hang on in the marketplace and the focus will stay on the domestically exposed stocks. Investors should note that small-cap stocks are seen as an indicator of the domestic economy.

These pint-sized companies deal mainly with the domestic economy. Due to their less global exposure, these stocks remain relatively less ruffled by a strong dollar. So this part of capitalization would be one of the best bets if the Fed takes the rate hike plunge later on the year.

Moreover, indecisiveness in prevalent in the global markets  due to Greek debt worries, slowdown in China and Japan, rate issues in the U.S. and the consequent movement in the greenback and finally the volatility in oil prices. These happenings might weigh on large-cap stocks leaving small-cap growth stocks and ETFs as intriguing choices.

These growth focused small caps have actually outperformed the broad market small cap ETFs lately by a pretty wide margin and have the potential to carry forward the trend (read: Growth ETFs at the Heart of The Market Rally).

Small-Cap Growth ETFs Upgraded to Buy Rating

Below, we highlight three small-cap growth ETFs all with Zacks Rank #1 (Strong Buy) or #2 (Buy), any of which could be an excellent play in the third quarter. Investors should note that each of these ETFs went through a Zacks rank upgrade recently (see all small cap ETFs here).

SPDR S&P 600 Small Cap Growth ETF(SLYG)

This ETF was upgraded from Zacks ETF Rank #3 (Hold) to Zacks ETF Rank #1. The ETF tracks the S&P SmallCap 600 Growth Index. Holding 351 securities, this fund is also well spread out across each sector and security.

Each security accounts for less than 1.27% while sector wise, Financials, Consumer Discretionary, Health Care, Information Technology and Industrials take the top five spots each with double-digit exposure, leaving a decent allocation for the utilities and telecom sectors.

This $575 million-fund trades at a paltry volume of 20,000 shares a day suggesting additional cost beyond the expense ratio of 0.15%. The ETF is up 9.6% year to date (as of June 19, 2015).

iShares Morningstar Small-Cap Growth ETF (JKK)

The product was upgraded from Zacks ETF Rank #3 to #2. This is an overlooked choice in the small cap space with AUM of $141.5 million and average trading volume of close to 2000 shares a day.

The 252-stock fund tracks the Morningstar Small Growth Index. It is well spread out across components as none of these holds more than 1.15% of assets. Sector wise, information technology (28.90%), and health care (22%) take the top two spots. The fund charges 30 bps in annual fees from investors and has gained 10.4% so far this year.

Guggenheim S&P SmallCap 600 Pure Growth ETF (RZG)

This ETF was upgraded from Zacks ETF Rank #3 to #1. The fund targets the small cap U.S. market and follows the S&P SmallCap 600 Pure Growth Index. Holding 132 securities in its basket, it is well spread out across components with each holding less than 2.17%.

Financials, Health Care, Consumer Discretionary, Information Technology, and Industrials are top five sectors with double-digit allocation each. The fund has amassed $166 million in its asset base and trades in light volume of about 20,000 shares a day on average. Expense ratio comes in at 0.35%. The product has surged 14.5% so far in the year.

Get the latest research report on SLYG - FREE

Get the latest research report on JKK - FREE

Get the latest research report on RZG - FREE

Get the latest research report on IWM - FREE

Get the latest research report on SPY - FREE