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Small Caps Taking Charge of the Bulls: 6 ETF Winners YTD

Sweta Killa

After a bumpy ride last year, the Wall Street staged a strong comeback on improving economic growth and dovish Fed. Additionally, the progress in trade negotiations between China and the United States added to the strength. In particular, China had offered a six-year increase in U.S. imports by a combined value of over $1 trillion that will help to reduce the annual trade deficit to zero by 2024. The United States had a trade deficit of $323 billion with China in 2018 (read: U.S., China to Reach a Trade Deal? ETF Areas to Gain).

While the gains are broad-based with both S&P 500 and Russell 2000 index off to their best start in the past 32 years, small caps have outperformed, posting a gain of 8.8% over the past 12 trading sessions versus 5.2% gain for the S&P 500, according to Dow Jones Market Data.

Behind the Outperformance of Small Caps

There are a number of reasons for the outperformance of small-cap stocks that will likely continue in the coming months. First, global issues like Brexit, trade war, global slowdown as well as slowing growth in Europe, Japan and China are giving boost to small caps, which are well insulated from these headwinds. This is because these stocks are closely tied to the U.S. economy and do not have much exposure to the international market.

With the government shutdown now spanning 31 days (the longest ever) and 800,000 federal workers on furlough, the risk of recession has increased significantly. Analysts surveyed by Bloomberg put the risk of a U.S. recession at the highest in more than six years. They see a  25% chance of a slump in the next 12 months, up from 20% in the December survey. Small-caps are considered safe and better plays if any political issue or economic turmoil creeps into the picture (read: Prolonged Shutdown Raises Recession Risk: ETFs to Consider).

Additionally, these stocks generally outperform on improving American economic health. The American economy added higher-than-expected 312,000 jobs in December — the biggest gain in 10 months — while unemployment jumped to 3.9%, the highest rate since August. Strong labor market coupled with higher wages, increasing consumer spending and rising consumer confidence have accelerated growth of the economy. Notably, the American economy is on track to expand at the fastest pace in 13 years. Further, the Fed comment that the central bank is not in a hurry to raise rates this year also bodes well for the pint-sized stocks.

Moreover, “January Effect,” which is a seasonal increase in stock prices largely due to year-end tax considerations, has been fueling a rally in the small-cap space (read: January Effect Seems Likely: Buy Small-Cap ETFs & Stocks).

With the latest rally, small caps still appear cheaper compared to their large-cap counterparts. Per Bank of America Merrill Lynch, small-cap valuations have fallen to 15-year lows relative to large-caps, with the P/E ratio of the Russell 2000 now below its long-term average.

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 of the current rally that have gained in double digits and will continue their outperformance.

ALPS Medical Breakthroughs ETF SBIO – Up 14.9%

This is a small-cap centric fund targeting biotech sector. It provides exposure to 72 companies with one or more drugs in Phase II or Phase III FDA clinical trials by tracking the Poliwogg Medical Breakthroughs Index. The product charges 50 bps in fees per year from investors and trades in a moderate average daily volume of about 81,000 shares. It has AUM of $184.6 million in its asset base and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Top ETFs of Last Week).

Inspire Small/Mid Cap Impact ETF ISMD – Up 11.4%

This ETF tracks the Inspire Small/Mid Cap Impact Equal Weight Index, which measures the stock performance of 500 of the most inspiring small and mid-cap companies in the United States, as determined by Inspire’s revolutionary Inspire Impact Score4 methodology, which measures a company’s positive impact on the world. The fund has accumulated $50.8 million in its asset base while trading in average daily volume of 15,000 shares. It charges 61 bps in annual fees.

iShares Morningstar Small-Cap Value ETF JKL – Up 11.3%

This product targets the value corner of the small cap space by tracking the Morningstar Small Value Index. It holds 240 stocks that are thought to be undervalued by the market relative to comparable companies and charges 30 bps in annual fees. The ETF has AUM of $404.5 million and trades in a volume of 9,000 shares per day on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Forget Growth, Bet on Value ETFs in 2019).

Janus Henderson Small Cap Growth Alpha ETF JSML – Up 11.3%

This ETF 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. JSML holds 200 stocks in its basket while charging 35 bps in annual fees. It trades in average daily volume of 16,000 shares and has a Zacks ETF Rank #2 (read: 4 Reasons to Bet on Top-Ranked Small-Cap Growth ETFs).

iShares Morningstar Small-Cap Growth ETF JKK – Up 11%

This ETF offers exposure to the growth corner of the small-cap space and follows the Morningstar Small Growth Index. It holds 252 securities in its basket. The ETF charges 30 bps in annual fees and trades in light volume of about 6,000 shares a day. It has amassed $166.3 million in its asset base and has a Zacks ETF Rank #2 with a Medium risk outlook.

Invesco S&P SmallCap Industrials ETF PSCI – Up 10.7%

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 98 securities and expense ratio of 0.29%. It has AUM of $98.9 million while trading in a lower volume of 14,000 shares. It has a Zacks ETF Rank #3 with a High risk outlook.

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