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Can These Top-Ranked Small Cap Growth ETFs Win in 2015? - ETF News And Commentary

Small-cap ETFs had a great show since mid 2014 as the U.S. economy started to take root and clocked an 11-year best performance in the third quarter. Other factors that brought luck for the U.S. small caps last year (despite a QE wrap-up) were the fastest annual job growth since late 1999, a strong dollar to hurt the offshore earnings of U.S. large caps and low oil price boosting consumer confidence.

Though this capitalization saw a great start to 2015 as well courtesy of better U.S. growth especially compared to the other parts of the developed world, it failed to maintain the wining momentum. The halt in the rally came on the heels of a moderation in the U.S. growth prospect in Q1. In its March meeting, the Fed lowered the U.S. economic growth projection for 2015 slightly.

While the investing world was busy digesting this downgrade, the economy offered another round of downbeat data – almost two-year low U.S. factory activity and a 14-month low ADP job reading for March. Since small cap stocks are more closely tied to the domestic economy, such a sudden blow slowed its rally for a valid reason. The ultra-popular small cap ETF (IWM) has added just 1% post March Fed meet, compared to the year-to-date gain of 5.3%.

What Lies Ahead?

Investors would surely be interested to know the future course of this otherwise promising spectrum of the U.S. stock market. Though the Fed policy tightening might cause some disruption in market activities ahead, it has noted that the hike in rates would be slower. A delayed rate hike or a slower increase (when the step is actually taken) could be the key to the success of small-caps, going forward (see all Small Cap ETFs here).

Investor should note that the U.S. dollar against a basket of currency is up 9.4% so far this year despite the recent Fed-induced sell-off. PowerShares DB US Dollar Bullish Fund (UUP) was down 1.1% in the last one month (as of April 13, 2015) with some strength gained since the first week of April. After all, sooner or later, the Fed is due for a rate hike. So, an uptrend in the greenback is also in arrears. This in turn would cut back on large cap gains and favor smaller capitalization (read: 2 ETF Winners and a Loser Post Fed Meeting).

Moreover, the latest round of glum data appears to have been seasonal as the country was wrapped in snow in Q1, refraining people from economic activity. Among the developed market pack, U.S. growth is still faster. Though the IMF recently cut the American economy’s growth projection for 2015 to 3.1% from 3.6% (projected in January), the organization described the U.S. economic backdrop as ‘robust’.

If you are a believer of this trend, betting on growth securities in smaller capitalization might allow you to earn more returns. However, it would be undoubtedly a high risk choice. So, gutsy investors can take the route of top-rated ETFs to play the potential U.S. growth, a further appreciation in the greenback and a late as well as sluggish rate hike. Below, we highlight four small-cap growth ETFs all with Zacks Rank #1 (Strong Buy), any of which could be an excellent play (read: Guide to Small Cap Growth ETFs Investing).

iShares Russell 2000 Growth ETF (IWO)

This is one of the popular and liquid ETFs in the small cap space with AUM of $7.33 billion and average trading volume of more than 1.1 million shares a day. The 1,206-fund tracks the Russell 2000 Growth Index. It is well spread out across components as none of these holds more than 1.11% of assets.

Sector wise, information technology, and health care take the top two spots with one-fourth share each. The fund charges 25 bps in annual fees from investors and has gained 2.8% so far this year (as of April 13, 2015) (read: Top-Ranked Small Cap ETFs for a Growing Economy).

iShares S&P Small-Cap 600 Growth ETF (IJT)

This $3.44 billion-fund follows the S&P SmallCap 600/Citigroup Growth Index and provides a diversified exposure to a broad basket of 350 stocks. None of the stocks holds more than 1.07% of assets. In terms of sectors, financials take the top spot with over one-fifth of the total. The product trades at a moderate volume of over 150,000 shares a day and charges 25 bps in fees.

The ETF is up 7% so far in the year.

Vanguard Small-Cap Growth ETF (VBK)

This ETF tracks the CRSP US Small Cap Growth Index, holding 737 securities in its basket. Financials, industrials, technology, health care and consumer services make up for double-digit allocation and each security does not hold more than 0.6% of total assets. This $4.54 billion fund is one of the low cost choices in the space, charging just 9 bps in fees per year from investors. The ETF is up nearly 7.3% so far this year.  

Vanguard S&P Small-Cap 600 Growth ETF (VIOG)

The ETF tracks the S&P Small-Cap 600 Growth Index. Holding 348 securities, this fund is also well spread out across each sector and security. Each security accounts for less than 1.7% while sector wise, financials and information technology take the top two spots with roughly one-fifth share, leaving a decent allocation for the health, industrials and consumer discretionary sectors.

This overlooked fund has hauled in $72.5 million in AUM and volume is rather weak, suggesting additional cost beyond the expense ratio of 0.20%. The ETF is up 6.9% year to date. Unlike the other three ETFs which offer a high risk outlook, VIOG has a moderate risk profile.

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ISHARS-R 2000 (IWM): ETF Research Reports
ISHARS-RS 2K GR (IWO): ETF Research Reports
ISHARS-SP SC GR (IJT): ETF Research Reports
VIPERS-SC GRWTH (VBK): ETF Research Reports
VANGD-SP6 GRWTH (VIOG): ETF Research Reports
PWRSH-DB US$ BU (UUP): ETF Research Reports
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