After lagging in the first five months of 2017, small cap stocks have regained their sheen and outperformed the broader U.S. market in June. This is especially true as the ultra-popular small-cap ETF (IWM - Free Report) is up 3.5% this month compared with a gain of 1.1% for the mid-cap counterpart (IJH - Free Report) and flat return for the large-cap cousin (SPY - Free Report) .

The outperformance has come on the back of a sell-off in the technology sector and re-emergence of geopolitics. The technology sector, which is the main driver of the stock rally this year, has seen a tumultuous ride on overvaluation concerns. In fact, the tech heavy Nasdaq closed below its 50-day moving average on June 29 for the first time since April 13, breaking below a key technical support level.

Political instability in Europe, chances of an end to the cheap monetary policy era across the globe and tension in the Gulf States have added to investors’ woes.

On the other hand, growth in the U.S. economy is on a solid path buoyed by an impressive labor market, increase in wages, rise in inflation and increasing consumer spending. Notably, the first-quarter final GDP growth was revised upward to 1.4% from the second estimate of 1.2% and the initial estimate of 0.7%. It reflects stronger exports and increased consumer spending. Additionally, consumer confidence is on the rise with Conference Board Consumer Confidence Index climbing to 118.9 in June from 117.9 in May.

Against such a backdrop, small cap stocks are the biggest beneficiaries as these are closely tied to the U.S. economy and do not have much exposure to the international market. These pint-sized stocks generate most of their revenues from the domestic market and generally outperform on improving American economic health. Further, these are free from the clutches of any political malaise or a strong greenback.

Since these companies are small, they are poised to grow more than their already tapped out large-cap counterparts. The Fed has raised interest rates three times in six months and looks to hike rates again later this year, indicating a stronger economy. This in turn are propelling small-cap stocks higher.

Given this, there have been winners in many corners of the small cap space. Below we have presented four ETFs & stocks that have easily crushed the broad market and are likely to continue their strong performance going forward:

Best ETFs

All these funds have a favorable Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold), suggesting room for more upside.

PowerShares S&P SmallCap Healthcare Fund (PSCH - Free Report)

This ETF targets the healthcare sector and tracks the S&P SmallCap 600 Capped Health Care Index.

Zacks ETF Rank: #2
AUM: $224.7 million
Expense Ratio: 0.29%
June Return: 6.8%

BioShares Biotechnology Clinical Trials Fund (BBC - Free Report)

This fund has a novel approach to biotechnology investing with exposure to companies in the clinical trials stage. This can easily be done by tracking the LifeSci Biotechnology Clinical Trials Index.

Zacks ETF Rank: #3
AUM: $24.8 million
Expense Ratio: 0.85%
June Return: 6.1%

iShares Micro-Cap ETF (IWC - Free Report)

This fund provides exposure to micro-cap stocks by tracking the Russell Microcap Index.

Zacks ETF Rank: #3
AUM: $855.3 million
Expense Ratio: 0.60%
June Return: 5.9%

PowerShares S&P SmallCap Financials Portfolio (PSCF - Free Report)

This product follows the S&P SmallCap 600 Capped Financials Index, which measures the performance of the companies engaged in the business of providing services and products, including banking, investment services, insurance and real estate finance services.

Zacks ETF Rank: #3
AUM: $243.6 million
Expense Ratio: 0.29%
June Return: 5.3%

Best Stocks

We have used our Zacks stock screener to find out the best performing stocks in the small cap space and then narrowed down the list to those with a Zacks Rank #1 or 2 and a Growth Style Score of ‘B’ or better.

The Growth Style Score analyzes the growth prospects of a company following a thorough analysis of the income statement, balance sheet and cash flow statement that evaluate its financial health and the sustainability of its growth trajectory. The results show that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Kadmon Holdings Inc. (KDMN - Free Report)

This New York-based biopharmaceutical company is engaged in the discovery, development and commercialization of small molecules and biologics within autoimmune and fibrotic, oncology and genetic diseases.

Zacks Rank: #2
Growth Style Score: A
Market Cap: $207.4 million
June Return: 82.3%

VOXX International Corporation (VOXX - Free Report)

This New York-based company is engaged in marketing automobile sound, vehicle security, mobile video systems, and consumer electronics products.

Zacks Rank: #2
Growth Style Score: B
Market Cap: $205.3 million
June Return: 53.4%

ARI Network Services Inc. (ARIS - Free Report)

This Wisconsin-based company is a provider of business-to-business Internet e-commerce solutions for manufacturers with shared distribution and service networks.

Zacks Rank: #1
Growth Style Score: A
Market Cap: $118.5 million
June Return: 28.8%

Lakeland Industries Inc. (LAKE - Free Report)

This New York-based company is engaged in the manufacturing and selling a range of safety garments and accessories for the industrial and public protective clothing market in the United States and internationally.

Zacks Rank: #1
Growth Style Score: A
Market Cap: $102.8 million
June Return: 25.3%