5 Sector ETFs at the Forefront of the Small-Cap Rally

In a broad market rally this month driven by optimism over a potential coronavirus vaccine, the reopening of the economy and a massive stimulus, small-cap stocks have outperformed. This is especially true as the Russell 2000 Index has risen nearly 7% in a month compared with a gain of 4% for the S&P 500.

The outperformance has mainly been driven by rising activities in the economy, which were otherwise halted due to lockdown measures induced by coronavirus. All the 50 states have lifted restrictions put in place to combat the coronavirus outbreak. The easing has started to propel demand, leading to renewed confidence among investors. In particular, the latest bouts of data indicate that the economic damage from the coronavirus pandemic was less severe than anticipated. Jobless claims fell for the first time during the pandemic era in the week ended May 23, while readings on durable goods beat forecasts. Additionally, stronger-than-expected consumer confidence and homebuilder confidence also led to some optimism.

As the pint-sized stocks are closely tied to the U.S. economy and do not have much exposure to the international market, they generally outperform on improving American economic health (read: Why Small-Cap ETFs & Stocks Outperformed Last Week).

Further, easing monetary policy has been the biggest catalyst to the small-cap rally. The central bank has slashed interest rates to near-zero levels. A low interest rate bodes well for small-cap stocks as it perks up economic activities and results in higher spending, thus boosting domestically focused companies. Moreover, small-cap stocks tend to perform well amid external issues like trade uncertainty, global slowdown concerns and geopolitical tension. Investors should note that tensions between the United States and China have flared up lately.

While there are winners in almost every corner of the small-cap space, we have presented five top-performing, small-cap ETFs from different sectors over the past month.

Invesco S&P SmallCap Consumer Discretionary ETF PSCD – Up 15%

The fund follows the S&P SmallCap 600 Capped Consumer Discretionary Index and holds 94 securities in its basket with none accounting for more than 4.3% of the assets. Specialty retail takes the largest share at 21.2% while household durables, auto components, textiles, apparel & luxury goods, and hotels, restaurants & leisure round off the next three with double-digit exposure each. The product has attracted $19.1 million in AUM while seeing paltry volume of 3,000 shares per day. The ETF charges 29 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Don't "Bet Against the American Economy:" ETF Areas to Win).

SPDR S&P Oil & Gas Equipment & Services ETF XES – Up 14.3%

This fund tracks the S&P Oil & Gas Equipment & Services Select Industry Index, which measures the performance of the companies engaged in the oil and gas equipment and services industry. Oil & gas equipment & services takes the largest share at 84.7% while oil & gas drilling takes the rest. The product holds 30 stocks in its basket with AUM of $95.3 million. It trades in average daily volume of 185,000 shares a day and charges 35 bps in fees per year from investors.

Sprott Junior Gold Miners ETF SGDJ – Up 12.4%

This fund follows the Solactive Junior Gold Miners Custom Factors Index, which measures the performance of junior gold producers with the strongest revenue growth and junior exploration companies with the strongest stock price momentum. It holds 46 stocks in its basket with Canadian firms making the largest share at 55.2%, followed by Australia (30.7%) and Russia (5.8%). The fund has amassed $62.8 million in its asset base and trades in moderate volume of around 29,000 shares a day. It charges 50 bps in annual fees from investors (read: How to Trade Powell's Comments on Economy With ETFs).

Invesco S&P SmallCap Materials ETF PSCM – Up 11.2%

This fund offers exposure to companies that are principally engaged in producing raw materials, including paper or wood products, chemicals, construction materials, and mining and metals. It follows the S&P SmallCap 600 Capped Materials Index, holding 36 securities in its basket. From an industrial look, chemicals takes the largest share at 58.4% followed by metals & mining (23.5%) and paper & forest products (15.4%). The fund has AUM of $9.8 million and trades in volume of 2,000 shares a day on average. It charges 29 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

Invesco S&P SmallCap Industrials ETF PSCI – Up 8.5%

This product follows the S&P SmallCap 600 Capped Industrials Index, which measures the performance of companies engaged in the business of providing industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace and defense, and general manufacturing. The product has a basket of 94 securities with an expense ratio of 0.29%. It has AUM of $38.4 million while trading in a lower volume of 6,000 shares. It has a Zacks ETF Rank #3 with a High risk outlook.

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SPDR SP Oil Gas Equipment Services ETF (XES): ETF Research Reports
 
Invesco SP SmallCap Consumer Discretionary ETF (PSCD): ETF Research Reports
 
Invesco SP SmallCap Materials ETF (PSCM): ETF Research Reports
 
Sprott Junior Gold Miners ETF (SGDJ): ETF Research Reports
 
Invesco SP SmallCap Industrials ETF (PSCI): ETF Research Reports
 
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