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Small-Cap Space on Fire This Week: 6 Best ETFs

Sweta Killa

Wall Street has made an impressive comeback after a rough August. This could be attributed to global easing money policies and positive developments in U.S.-China trade relations that have instilled strong confidence in the stock market, returning investors’ risk appetite.

While the rally has been broad-based, small-cap stocks have been leading the way higher with the Russell 2000 index on track for its best performance in the week, having gained nearly 4.3% so far. In comparison, the S&P 500, Dow Jones and Nasdaq Composite Index are up 0.9%, 1.3% and 1%, respectively. The outperformance came as investors are shifting away from defensive stocks and momentum names toward cyclicals and small caps in a move that could signal confidence about future economic growth (read: Momentum ETFs & Stocks in Focus as Trump Delays Tariff Hike).

The small-cap space was badly hit by the concerns related to intensifying trade war and recession warnings. Now, the most beaten down corner of the broader market is outperforming with recovering sentiments. The pint-sized stocks are closely tied to the U.S. economy and do not have much exposure to the international market. These stocks generally outperform on improving American economic health. The U.S. economy is growing well, backed by strong jobs growth, rising consumer spending, higher consumer confidence, recovering housing market as well as lower rates.
 
In fact, low rates bode well for the pint-sized stocks, perking up economic activities and resulting in higher spending and thus boosting domestically focused companies. The Federal Reserve has cut interests rates for the first time in more than a decade and is expected to slash it further in the coming week. Market expectations of a 25 basis-point rate cut are 91.2%, according the CME Group’s FedWatch tool (read: Small-Cap Value ETFs Rallying Hard: Here's Why).

That being said, there are winners in almost every corner of the small-cap space. Below, we have presented six top performing small-cap ETFs this week, which are expected to continue their outperformance if the same trend prevails.

Invesco S&P SmallCap Value with Momentum ETF XSVM – Up 6.6%

This fund offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. It holds a basket of 119 stocks with each accounting for less than 3.5% of assets. The ETF has accumulated $78 million in its asset base and charges 39 bps in annual fees. It trades in light volume of 5,000 shares per day on average.

Invesco KBW Regional Banking ETF KBWR – Up 5.9%

This fund targets the banking segment of the broad financial sector and follows the KBW Regional Banking Index. It holds 50 stocks in its basket with each accounting for less than 4.2% share. It is a relatively less popular and less liquid option in the space, with AUM of $71.2 million and average daily volume of 6,000 shares. The product charges 35 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Bank ETFs Benefit From Steepening Yield Curve, But How Long?).

WisdomTree U.S. SmallCap Quality Dividend Growth Fund DGRS – Up 5.4%

This fund provides exposure to dividend-paying small-cap companies with growth characteristics in the U.S. equity market. It follows the WisdomTree U.S. SmallCap Quality Dividend Growth Index, charging investors 38 bps in annual fees. The ETF holds a broad basket of 263 stocks with none making up for more than 2.3% of assets. It has amassed $120.8 million in its asset base and trades in around 10,000 shares per day in average. DGRS has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Invesco S&P SmallCap Consumer Staples ETF PSCC – Up 5.3%

This fund targets the small-cap segment of the consumer staples sector by tracking the S&P SmallCap 600 Capped Consumer Staples Index. It holds 24 stocks in its basket with a modest concentration on the top firms. The ETF has managed assets worth $50.1 million and trades in average daily volume of 4,000 shares. It charges 29 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top-Performing Consumer Staples ETFs This Year).

Invesco S&P SmallCap Industrials ETF PSCI – Up 5.2%

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 each accounting for less than 3.2% share and expense ratio of 0.29%. It has AUM of $58.4 million while trading in lower volume of 4,000 shares. It has a Zacks ETF Rank #3 with a High risk outlook.

Inspire Small/Mid Cap Impact ETF ISMD – Up 4.9%

This ETF tracks the Inspire Small/Mid Cap Impact Equal Weight Index, which measures the stock performance of the most inspiring small and mid-cap companies in the United States, as determined by Inspire’s revolutionary Inspire Impact Score4 methodology. It holds a well-diversified portfolio of 501 stocks with none accounting for more than 0.35% share. The fund has accumulated $94.8 million in its asset base while trading in average daily volume of 18,000 shares. It charges 61 bps in annual fees.

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