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Buy Small-Cap ETFs, Stocks on Solid Data, Renewed Trade Fear

Sweta Killa

After reaching a peak, the Wall Street tumbled with the return of Trump’s tariff threat, which he has been holding back since February on hopes of a positive deal. Trump intends to increase tariff to 25% from 10% on Chinese goods worth $200 billion this week and threatened additional 25% tariff on further $325 billion of Chinese goods "shortly." This has marked a major escalation in trade tensions between the world's two largest economies and intensified worries of global growth.

On the other hand, the latest bout of data indicates a strong economy, which bodes well for the stock market. The U.S. economy added jobs every month for 103 consecutive months, representing the longest-ever streak of job creation. Unemployment rate has dropped to 3.6% — the lowest in nearly 50 years — while wages rose at an annual rate of 3.2% in April, the ninth consecutive month of growth over 3% (read: Solid US Labor Market Puts Focus on 3 Sector ETFs & Stocks).

Strong hiring and increasing wages will boost consumer spending and keep the economy on a solid growth path. The American economy expanded at a faster-than-expected rate of 3.2% in the first quarter of 2019, marking the best GDP growth to start the year since 2015. Americans are also feeling optimistic with consumer confidence rebounding back in April. Additionally, a surge in oil price and the Fed’s decision of not raising interest rates this year after seven hikes over the past two years also bolstered investor sentiment (read: US Q1 GDP Growth Trumps Expectations: ETF Areas to Win).

Against this backdrop, small-cap stocks are more likely to outperform given their true domestic exposure and insulation from the ongoing global headwinds. Further, the pint-sized stocks generally led the way higher on an improving American economy, though these are highly volatile and could lead to huge losses in an erratic market.

While there are several options to play on the bullish trends, we have presented five small-cap ETFs & stocks that have outperformed the market so far and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), suggesting their continued outperformance. Honing in on the growth factor in this market capitalization, investors can earn more. This is because growth stocks refer to high-quality stocks that are likely to witness revenue and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in higher share prices.

ETF Picks

iShares Morningstar Small-Cap Growth ETF JKK

This product offers exposure to small-cap U.S. companies whose earnings are expected to grow at an above-average rate relative to the market (read: Small-Caps Beat S&P 500 in Q1: 5 ETF Winners).

Zacks ETF Rank: #2
Expense Ratio: 0.30%
AUM: $218.5 million
YTD Return: 25.1%

Vanguard Small Cap Growth ETF VBK

This product offers exposure to small-capitalization growth stocks.

Zacks ETF Rank: #2
Expense Ratio: 0.07%
AUM: $9.1 billion
YTD Return: 24.6%

Invesco Russell 2000 Pure Growth ETF PXSG

This ETF offers exposure to the small-cap companies having a strong growth characteristics selected from the Russell 2000 Index.

Zacks ETF Rank: #2
Expense Ratio: 0.39%
AUM: $91.8 million
YTD Return: 23.9%

Small Cap Growth Alpha ETF JSML

This fund follows the Janus Henderson Small Cap Growth Alpha Index, which systematically identifies Smart Growth companies utilizing a process based on Janus Henderson’s 45+ years of fundamental research. The strategy seeks to provide risk-adjusted outperformance by identifying top-tier small-cap companies with some of the strongest fundamentals that have proven operational excellence and represent the top 10% of the eligible universe.

Zacks ETF Rank: #2
Expense Ratio: 0.35%
AUM: $30.9 million
YTD Return: 23.5%

iShares Russell 2000 Growth ETF IWO

This fund also provides exposure to small-cap U.S. companies whose earnings are expected to grow at an above-average rate relative to the market (read: 5 ETF Strategies to Beat Sell in May and Go Away).

Zacks ETF Rank: #1
Expense Ratio: 0.24%
AUM: $9.5 billion
YTD Return: 22.7%

Stock Picks

Sunworks Inc. SUNW

It provides solar power solutions, focusing on the design, installation and management of solar power systems for commercial, agricultural and residential customers. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zacks Rank: #1
Growth Score: A
Market Cap: $35.8 million
YTD Return: 422.9%

Limbach Holdings Inc. LMB

It is a provider of building systems. The company engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems.

Zacks Rank: #1
Growth Score: A
Market Cap: $66.9 million
YTD Return: 137.8%

Fuel Tech Inc. FTEK

It is a leading technology company engaged in the worldwide development, commercialization and application of state-of-the-art proprietary technologies for air pollution control, process optimization, and advanced engineering services (read: 5 Small-Cap ETFs & Stocks Beating Russell 2000).

Zacks Rank: #1
Growth Score: A
Market Cap: $59 million
YTD Return: 105%

SITO Mobile Ltd. SITO

It is a technology based mobile solutions provider that provides wireless application development, publishing and distribution.

Zacks Rank: #2
Growth Score: A
Market Cap: $46.2 million
YTD Return: 101.1%

Vectrus Inc. VEC

It is engaged in providing infrastructure asset management, logistics and supply chain management, and information technology and network communication services (see: all the Small Cap ETFs here).

Zacks Rank: #2
Growth Score: A
Market Cap: $477.1 million
YTD Return: 94.8%

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