ETFs
Tap into the power of utilities and small caps with these ETFs
As the three major exchanges approach record highs, investors are turning to sectors such as utilities and small caps, which are cheap and undervalued. These areas outperformed in May.
THE SPDR Fund for Selected Utilities Sector XLU emerged as the best performer among 11 SPDR ETFs tracking S&P 500 sectors. It rose nearly 9% last month, posting its largest monthly gain since March 2022, according to FactSet data. Meanwhile, small-cap stocks, as tracked by the Russell 2000 index, outperformed the S&P 500 and the Dow Jones with a monthly gain of 4.9%. This is the best month for small caps since February.
Investors looking to tap into these hottest areas of the stock market might consider using ETFs in these spaces. Although the list is long, we have highlighted the five most popular options in these areas. These include SPDR Fund for Selected Utilities Sector XLU, Vanguard Utilities ETF VPU, iShares Core S&P Small Cap ETF IJR, iShares Russell 2000 ETF IWM, and Vanguard Small Cap ETF VB.
We have cited here the reasons for their good performance. This trend is expected to continue in the coming weeks.
Utility
The utilities sector, which tends to outperform when the economy is in recession, is making the most of the current volatility and uncertainty triggered by the timing of Fed rate cuts, the slowing economy and geopolitical tensions. As a low beta sector, utilities are relatively insulated from significant fluctuations (ups and downs) in the stock market and are therefore considered a defensive investment or safe haven in times of economic or political turmoil (read: Here’s why Utility ETFs Reach New Highs).
Additionally, growing demand for electricity driven by artificial intelligence chips and software has made the traditional defensive sector of the market the most attractive.
Small caps
Small-cap stocks are also considered safer and more efficient if political issues or economic turmoil come into play, since smaller stocks generate most of their income in the domestic market. The latest survey from the National Federation of Independent Business found that small business optimism rebounded 1.2 points, from the lowest level since December 2012 to 89.7 in April.
Small-cap stocks appear attractively valued. According to the firm’s senior U.S. market strategist Dave Sekera’s recent analysis, “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”.
In addition, 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. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to reach $811.75 billion by 2030 (read: 5 Leading ETFs of the small cap rally).
The story continues
Focus on ETFs
Utilities Select sector SPDR (XLU)
With $14 billion in assets under management, Utilities Select Sector SPDR seeks to provide exposure to companies in the electric utility, water utility, multi-utility producer, independent power producer and electricity and renewable electricity and gas utility sectors. It tracks the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 65.9%, followed closely by multiple utilities (25.9%). Utilities Select Sector SPDR charges 9 basis points in annual fees and sees significant volume of 13.5 million shares on average. It has a Zacks ETF Rank #3 (Hold).
Vanguard Utilities ETF (VPU)
The Vanguard Utilities ETF tracks the MSCI US Investable Market Utilities 25/50 Index, holding 65 stocks in its basket, with no one accounting for more than 12.4% of the shares. Around 62.4% of the portfolio is allocated to electric utilities, closely followed by multiple utilities (25.3%). Vanguard Utilities ETF charges 10 basis points in annual fees and sees good volume of around 171,000 shares on average. It has $5.7 billion in assets under management and a Zacks ETF Rank #3.
iShares Core S&P Small Cap ETF (IJR)
The iShares Core S&P Small-Cap ETF provides exposure to small-cap U.S. stocks and tracks the S&P SmallCap 600 Index. It holds 681 stocks in its basket, none of which represent more than 2% of assets. Financials, Industrials, Consumer Discretionary, Information Technology and Healthcare are the top five sectors with double-digit exposure each. The iShares Core S&P Small-Cap ETF has $78.5 billion in assets under management and trades an average daily volume of 3 million shares. The product charges investors 6 basis points in annual fees.
iShares Russell 2000 ETF (IWM)
The iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with $59 billion in assets under management and an average daily volume of 27 million shares. The iShares Russell 2000 ETF has 1,937 well-diversified stocks in its basket and holds key holdings in the industrials, financials, information technology, healthcare and consumer discretionary sectors. The iShares Russell 2000 ETF charges 19 basis points in annual fees and has a Zacks ETF Rank #2 (Buy) (read: ETFs Worth Watching on Russell Index Shakeup).
Vanguard Small Cap ETF (VB)
The Vanguard Small-Cap ETF tracks the CRSP US Small Cap Index and holds a basket of 1,417 stocks, none of which holds more than 0.5% of assets. The Vanguard Small-Cap ETF is widely distributed across various sectors, with industrials, consumer discretionary, financials, information technology, and healthcare being the top five. The Vanguard Small-Cap ETF has $55.3 billion in assets under management and trades in a solid average daily volume of approximately 562,000 shares. VB charges 5 basis points of fees per year to investors.
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iShares Russell 2000 ETF (IWM): ETF Research Reports
SPDR Select Utility Sector ETF (XLU): ETF Research Reports
Vanguard Utilities ETF (VPU): ETF Research Reports
iShares Core S&P Small-Cap ETF (IJR): ETF Research Reports
Vanguard Small-Cap ETF (VB): ETF Research Reports