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5 Big Reasons Why Small-Cap ETFs Are Leading

This article was originally published on ETFTrends.com.

Small-cap stocks and the related small-cap ETFs, including the iShares Core S&P Small-Cap ETF (IJR) , which tracks the S&P Small-Cap 600 Index, are equity market leaders this year. There are several reasons why that is the case.

Keeping the the small-cap’s momentum going, traders believed smaller companies were insulated from the overseas turmoil. A stronger U.S. dollar and concerns over weaker global growth also pushed investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy.

The tax reform legislation passed late last year is among the catalysts helping smaller stocks.

“Small-cap companies tend to source a larger portion of their revenue domestically compared to large caps,” according to BlackRock. “As such, they pay an estimated corporate tax rate of around 32% vs. 28% for larger firms. Recent tax cuts passed by Congress therefore benefit smaller companies more than larger ones–a trend that has contributed to out-performance at the sector level within small caps, especially amongst tax-heavy sectors such as financials and telecoms.”

Related: The Best Performing ETF 2018 Year-To-Date Is…

Good Reasons for Small-Cap Outlook

Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data. U.S. economic conditions are also more favorable for the domestically oriented small-caps as companies are still digesting the benefits of increasing deregulation and U.S. tax reforms.

Furthermore, the upbeat pace in U.S. small-caps are attracting foreign investors as well. According to the CME Group, there is growing interest among global investors for U.S. small-cap exposure, especially with volume coming from Europe, Asia-Pacific and Latin America regions in addition to North America.

Related: The Best Small-Cap ETFs Leading Market’s Charge

“Small-cap companies on average are less exposed to foreign markets and currency fluctuations than larger companies,” said BlackRock. “The U.S. dollar has rallied more than 5% against a basket of foreign currencies since April. This has led to relative foreign currency weakness that has eroded large-cap companies’ overseas profits, resulting in lower earnings and equity valuations. In contrast, small companies enjoyed lower input costs for imported raw materials due as the U.S. dollar has strengthened.”

For more information on small-capitalization stocks, visit our small-cap category.

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