ETFs
5 ETFs leading the small-cap rally – May 15, 2024
Small-cap stocks, as measured by the Russell 2000 Index, are back in vogue with a powerful rally in May. The index gained about 7.1% in a month, outperforming the 4.5% rise in the large-cap S&P 500 index. This outperformance came as investors flocked to the cheap and under-priced segments. market valuations. Renewed bets on a rate cut this year and growing optimism among U.S. small business owners have supported the recovery.
Given the strong momentum in the sector, we’ve highlighted a few ETFs that have led the rally over the past month and could be better plays going forward, given their Zacks ETF Rank #3 (Hold). These are Invesco S&P SmallCap Utilities & Communication Services ETF (PSCU – Free report) , iShares ESG Screened S&P Small-Cap ETF (XJR – Free report) , Inspire Small-Mid Cap ETF (ISMD – Free report) , Invesco S&P SmallCap Momentum ETF (XSMO – Free report) And iShares Core S&P Small Cap ETF (IJR – Free report) .
Small-cap stocks look cheap compared to their expensive large-cap counterparts. According to WSJ data, the Russell 2000 is currently trading at a P/E ratio of 26.38, down from last year’s level of 30.24. In comparison, the S&P 500 Index has become expensive, currently trading at a P/E ratio of 23.24, up from last year’s level of 18.42. According to an analysis by Dave Sekera, the firm’s senior U.S. market strategist, “small-cap stocks trade at an 18% discount to fair value, making them the least expensive U.S. asset class.” price of the Morningstar Style Box”.
The latest survey from the National Federation of Independent Business found that small business optimism rebounded 1.2 points, from its lowest level since December 2012 to 89.7 in April (read: ETFs to tap as investors become most bullish since November 2021).
The bouts of pessimistic data have revived bets on an anticipated rate cut by the Federal Reserve. Although small caps outperform when the economy improves, they are also the biggest beneficiaries of rate cuts. This is because these smaller businesses have higher debt levels and lower interest rates generally result in lower borrowing costs. This helps small businesses scale their operations more easily and results in increased profitability. This in turn stimulates economic growth.
Additionally, small-cap stocks are considered safer and more efficient if political problems or economic turmoil arise because small-cap stocks generate most of their income in the domestic market. Escalating tensions in the Middle East, the ongoing war between Russia and Ukraine and the upcoming US presidential election have boosted the appeal of small-cap stocks (read: 5 Defensive Investing ETF Strategies for Your Portfolio).
Additionally, the popularity of artificial intelligence (AI) promises to pave the way for new growth opportunities. While large-cap companies dominate the world of AI, many small-cap stocks with huge potential in this space remain untapped. The global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030, according to a new report from Grand View Research.
Focus on ETFs
Here we have presented the profile of the ETFs mentioned above:
Invesco S&P SmallCap Utilities & Communication Services ETF (PSCU – Free report) – Up 5.9%
The Invesco S&P SmallCap Utilities & Communication Services ETF provides exposure to securities of U.S. utility companies and companies in the communications services industry. It tracks the S&P SmallCap 600 Capped Utilities & Communication Services Index, holding 37 stocks in its basket. The Invesco S&P SmallCap Utilities & Communication Services ETF has accumulated $14.5 million in its asset base while trading an average daily volume of 1,000 shares (read: Here’s why utility ETFs are hitting new highs).
iShares ESG Screened S&P Small-Cap ETF (XJR – Free report) – Up 5.2%
The iShares ESG Screened S&P Small-Cap ETF provides exposure to U.S. small-cap stocks selected for sustainability considerations by tracking the S&P SmallCap 600 Sustainability Screened Index. It holds 609 stocks in its basket, with key holdings in the financials, industrials, consumer discretionary, information technology and healthcare sectors. The iShares ESG Screened S&P Small-Cap ETF has $71.6 million in assets under management and charges 12 basis points in annual fees. It trades an average daily volume of 6,000 shares.
Inspire Small/Mid Cap ETF (ISMD – Free report) – Up 4.9%
The Inspire Small/Mid Cap 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 the groundbreaking Inspire Impact methodology Inspire score. He holds a well-diversified portfolio of 501 stocks, with no one accounting for more than 0.54% of the shares. The Inspire Small/Mid Cap ETF has accumulated $186.1 million in its asset base while trading an average daily volume of 33,000 shares. It charges 59 basis points in annual fees.
Invesco S&P SmallCap Momentum ETF (XSMO – Free report) – Up 4.7%
The Invesco S&P SmallCap Momentum ETF provides exposure to companies in the S&P SmallCap 600 Index with the highest “momentum scores.” It tracks the S&P Smallcap 600 Momentum Index, holding 116 stocks in its basket. The Invesco S&P SmallCap Momentum ETF has amassed $643.7 million in its asset base and charges 39 basis points in annual fees. The fund trades an average daily volume of 137,000 shares.
iShares Core S&P Small-Cap ETF (IJR – Free report) – Up 4.6%
The iShares Core S&P Small-Cap ETF provides exposure to small-cap U.S. stocks and tracks the S&P SmallCap 600 Index. The iShares Core S&P Small-Cap ETF holds 681 stocks in its basket, none of which are worth more than 0 .7% of assets. Financials, Industrials, Consumer Discretionary, and Information Technology are the top four sectors with double-digit exposure each. The iShares Core S&P Small-Cap ETF is the largest and most popular ETF in the small-cap space, with $79 billion in assets under management and an average daily volume of 4 million shares. The product charges investors 6 basis points in annual fees.
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