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Small-Cap ETFs Take the Lead in the New Year

This article was originally published on ETFTrends.com.

Small-capitalization stock ETFs are outperforming in the New Year, notably those with a value tilt, and these smaller companies could keep their lead as earnings among larger firms slow.

So far in 2019, among the best performing small-cap ETFs, the Invesco S&P Smallcap 600 Pure Value ETF (RZV) increased 8.6%, Oppenheimer Small Cap Revenue ETF (RWJ) advanced 6.9% and Invesco Russell 2000 Pure Value ETF (PXSV) gained 6.2%. In comparison, the S&P 500 was up 1.7%.

With major U.S. players like Apple (AAPL) cutting down revenue expectations for the first quarter, many investors are concerned about profits as lingering volatility, the trade scuffle between the U.S. and China, broader economic weakness and fading benefits of tax reforms begin to weigh on sentiment ahead, the Wall Street Journal reports.

However, analysts expect firms in the benchmark Russell 2000 index to generate double-digit profit gains throughout 2019. Profits across the Russell 2000 is expected to grow by almost 16% over the first quarter year-over-year after the 12.6% earnings growth rate expected in the final three months of 2018. Some even project the the small-cap benchmark to see profits surge to over 30% year-over-year in the fourth quarter of 2019.

“We’re positive on small-caps,” Paul Lambert, a portfolio manager at Wasatch Advisors, told the WSJ. “We’re finding quality [small-cap] companies growing faster than mid- and large-cap companies.”

Related: Small Caps Providing Big Gains for Leveraged ETFs

The recent selling has been particularly damaging for the small-cap segment as small company stock valuations are at their lowest level in over six years and below that of their larger counterparts at the S&P 500. Consequently, Lambert argued that the cheap valuations would attract cost-conscious investors whom believe smaller companies have been oversold.

Furthermore, the economy is still chugging along, albeit at a slower pace than before. Solid consumer confidence could also bolster the small-cap outlook, notably those that focus on the domestic economy, whereas big multinationals with a larger international footprint will have to suffer through a slowdown in Europe and Asia, along with the strengthening U.S. dollar that hurts foreign sales.

For more information on the small capitalization stock segment, visit our small-caps category.