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Time for Small-Cap ETFs Now?

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U.S. small-cap index the Russell 2000 gained the most last week among key U.S. indexes having recorded 4.9% gains. The Russell 2000 of small caps already crossed its 200-day average, showing a great momentum. The small-cap index is now at its cheapest versus the large- cap Russell 1000 since March 2020, according to Jefferies data, giving every reason for bargain-hunting, as quoted on Reuters.

Things are taking a turn for the better for the pint-sized stocks as these have more domestic exposure and several U.S. economic data points came in favorable lately. Shares of smaller U.S. companies are outdoing a rally in the broader equity market as the small-cap Russell 2000 skyrocketed 14.3% in the past month against a 10.2% jump for the benchmark S&P 500.

Small-caps are cheaper than large-caps. The Russell 2000 has dropped 16% in 2022 despite July's rally, compared with the S&P 500’s 13.3% decline. Many investors are believing that markets have priced in the economic recession. The latest data revealed that U.S. gross domestic product shrank for the second straight quarter, meeting an often-cited criterion of a recession.

Moreover, latest data points have eased the recessionary fears too. Inflation in the United States moderated slightly as energy and gasoline prices dropped. This is especially true as the consumer price index (“CPI”) jumped 8.5% year over year in July, down from a 9.1% year-over-year increase in June, which was the fastest increase since November 1981. The producer price index (PPI) showed prices fell 0.5% sequentially compared to expectations of a 0.2% increase.

U.S. consumer sentiment rose in August from a record low earlier this summer, and American households' near-term outlook for inflation fell. The University of Michigan's preliminary August reading on the overall index on consumer sentiment came in at 55.1, up from 51.5 in the prior month. It had touched a record low of 50 in June.

The preliminary August reading was above the median forecast of 52.5 among economists polled by Reuters. While the survey's barometer of current economic conditions dropped unexpectedly to 55.5 from 58.1, its gauge of consumer expectations rose to 54.9 from 47.3, with the 16.1% spike from July as the largest percentage increment since 2009.

Per Earnings Trends issued on Aug 10, 2022, the S&P 500 earnings are projected to grow 19.7% in Q2 on 22.9% higher revenues, with 65.6% beating EPS estimates and 73.3% beating revenue estimates. Total earnings or aggregate net income are expected to be up 14.2% from the same period last year on 20.5% higher revenues.

Against this backdrop, investors may try out some small-cap ETFs that are on high momentum.

ETFs in Focus

Direxion Low Priced Stock ETF – Up 10.5% Past Week

The underlying Solactive Two Bucks Index is an equal-weighted index which measures the performance of U.S.-listed securities with relatively low trading prices. The fund charges 50 bps in fees.

Motley Fool Small-Cap Growth ETF (TMFS - Free Report) – Up 5.1%

This ETF is active and does not track a benchmark. The Motley Fool Small-Cap Growth ETF seeks is to achieve long-term capital appreciation. The fund charges 85 bps in fees.

Avantis U.S. Small Cap Value ETF (AVUV - Free Report) – Up 4.5%

The Avantis U.S. Small Cap Value ETF seeks long-term capital appreciation by investing primarily in a diverse group of U.S. small cap companies across market sectors and industry groups. The fund charges 25 bps in fees.

Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) – Up 4.1%

The underlying S&P MidCap 400 Pure Value Index measures the performance of securities that exhibit strong value characteristics in the S&P MidCap 400 Index. The fund charges 35 bps in fees.

Vanguard Small Cap Value ETF (VBR - Free Report) – Up 3.8%

The underlying CRSP U.S. Small Cap Value Index measures the investment return of small-capitalization value stocks. The fund charges 7 bps in fees.

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