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Top-Ranked Small-Cap ETFs to Avoid Global Supply Chain Woes
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The global economy, including the United States, has been struggling to cope with red-hot inflation. Investors should note that this time high inflation has not come with the general economic well-being, rather, it bothered the world due to supply-chain woes caused by COVID-19-led lockdowns and the Russia-Ukraine war. Hence, inflation this time is going to stay as the supply-chain woes will not ebb soon.
Probably this is why the theme of deglobalization should be considered seriously right now. Local produce, local manufacturing and local sales are important now. This is where small-cap stocks win. These are domestically focused and less dependent on foreign sales and procurement and thus have extremely high shipping rates.
The small-cap space has lately fared better than the Nasdaq. The S&P 500 has declined 16.6% in the past three months, the Nasdaq has slipped 22% and iShares Russell 2000 ETF (IWM - Free Report) has lost 19% (as of Jun 22, 2022).
Strong Greenback
Small-cap stocks have more domestic exposure than their bigger peers and hence are less unscathed amid a greenback rally. WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU - Free Report) was up 4.4% in the last three months. The greenback may gain strength further ahead due to faster Fed rate hikes. This is yet another reason why small-cap stocks and ETFs could fare better than the large-cap stocks
Decent Earnings Picture
The earnings picture remains decent. Per the Earnings Trends issued on Jun 22, 2022, earnings growth for Q1 of 2022 for the S&P 600 Index is expected to be 8.5% on 12.7% of revenue growth. The earnings growth for Q2 of 2022 will likely be 17.8% over 11.9% revenue growth.
GDP Growth Projections Fall, But Still in Growth Zone
The Fed has downgraded its forecast for 2022 median real GDP growth from 2.8% in March to 1.7% for 2022. It has also lowered the growth rate expectations to 1.7% (from 2.2% in March) for 2023 and 1.9% (from 2% in March) for 2024.The inflation projection has been upped for this year, while the Fed expects inflation to cool off in 2023 and 2024. This kind of scenario should keep small-cap stocks in fine fettle.
Why Value?
The federal funds rate is projected to be 3.4% for 2022 from 1.9% in March, 3.8% for 2023 from 2.8% and 3.4% for 2024 from 2.8%. Since value stocks fare better in a rising rate environment than growth stocks, tapping small-cap value ETFs makes sense.
Against this backdrop, below we highlight a few small-cap value ETFs that have a Zacks Rank #2 (Buy) or Zacks Rank #1 (Strong Buy).
Image: Bigstock
Top-Ranked Small-Cap ETFs to Avoid Global Supply Chain Woes
The global economy, including the United States, has been struggling to cope with red-hot inflation. Investors should note that this time high inflation has not come with the general economic well-being, rather, it bothered the world due to supply-chain woes caused by COVID-19-led lockdowns and the Russia-Ukraine war. Hence, inflation this time is going to stay as the supply-chain woes will not ebb soon.
Probably this is why the theme of deglobalization should be considered seriously right now. Local produce, local manufacturing and local sales are important now. This is where small-cap stocks win. These are domestically focused and less dependent on foreign sales and procurement and thus have extremely high shipping rates.
The small-cap space has lately fared better than the Nasdaq. The S&P 500 has declined 16.6% in the past three months, the Nasdaq has slipped 22% and iShares Russell 2000 ETF (IWM - Free Report) has lost 19% (as of Jun 22, 2022).
Strong Greenback
Small-cap stocks have more domestic exposure than their bigger peers and hence are less unscathed amid a greenback rally. WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU - Free Report) was up 4.4% in the last three months. The greenback may gain strength further ahead due to faster Fed rate hikes. This is yet another reason why small-cap stocks and ETFs could fare better than the large-cap stocks
Decent Earnings Picture
The earnings picture remains decent. Per the Earnings Trends issued on Jun 22, 2022, earnings growth for Q1 of 2022 for the S&P 600 Index is expected to be 8.5% on 12.7% of revenue growth. The earnings growth for Q2 of 2022 will likely be 17.8% over 11.9% revenue growth.
GDP Growth Projections Fall, But Still in Growth Zone
The Fed has downgraded its forecast for 2022 median real GDP growth from 2.8% in March to 1.7% for 2022. It has also lowered the growth rate expectations to 1.7% (from 2.2% in March) for 2023 and 1.9% (from 2% in March) for 2024.The inflation projection has been upped for this year, while the Fed expects inflation to cool off in 2023 and 2024. This kind of scenario should keep small-cap stocks in fine fettle.
Why Value?
The federal funds rate is projected to be 3.4% for 2022 from 1.9% in March, 3.8% for 2023 from 2.8% and 3.4% for 2024 from 2.8%. Since value stocks fare better in a rising rate environment than growth stocks, tapping small-cap value ETFs makes sense.
Against this backdrop, below we highlight a few small-cap value ETFs that have a Zacks Rank #2 (Buy) or Zacks Rank #1 (Strong Buy).
Vanguard SmallCap Value ETF (VBR - Free Report) – Zacks Rank #1
iShares Russell 2000 Value ETF (IWN - Free Report) – Zacks Rank #1
SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report) – Zacks Rank #2
Vanguard Russell 2000 Value ETF (VTWV - Free Report) – Zacks Rank #2
WisdomTree U.S. SmallCap Dividend ETF (DES - Free Report) – Zacks Rank #2
iShares S&P SmallCap 600 Value ETF (IJS - Free Report) – Zacks Rank #2