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The U.S. small-cap index the Russell 2000 has outperformed its bigger peer equity gauges by wide margin past month (as of Aug 24, 2022). The Russell 2000 (up 6.2% past month) clearly has beaten the S&P 500 (up 5.5%), the Dow Jones (up 2.9%) and the Nasdaq Composite (up 5.1%).
The potential of small-caps looks even brighter as these have less domestic exposure and outperform in a rising greenback environment. The U.S. dollar ETF (UUP - Free Report) is hovering around a 52-week high and has gained 13.3% this year on faster and fatter Fed rate hikes.
Cheaper Valuation of Small-Caps
Small-caps are cheaper than large-caps. The Russell 2000 has dropped 13.8% in 2022 despite recent rally, compared with the S&P 500’s 13% decline. However, many investors are believing that markets have priced in the economic recession. Citi U.S. equity strategists wrote “stocks down the market cap spectrum appear closer to pricing in recession than their Large Cap peers," as quoted on Reuters.
Decent Earnings Picture of Small-Caps
Per Zacks Earnings Trends issued on Aug 24, 2022, the S&P 500 earnings are projected to grow 6.7% in Q2 on 14% higher revenues. This increment in earnings will follow a 9.8% increase in Q1. Revenue growth in Q1 was 13.6%.
Looking at Q2 as a whole for the small-cap index, total earnings are expected to be up 12.1% from the same period last year on 20.6% higher revenues. The growth in earnings will follow a 24.9% expansion in Q1. Revenue growth in Q1 was 21.5% (read: Small-Cap Sector ETFs to Tap In Light of Q2 Earnings).
Decent Economic Indicators, Though Not Great
U.S. retail sales unexpectedly stalled in July of 2022, disappointing markets that expected a 0.1% increase as sales dropped at gasoline stations and car dealers. On the other hand, sales at non-store retailers jumped 2.7% thanks toAmazon’s Prime Day event on July 12 and 13.
On Aug 1, 2022, the ISM Manufacturing PMI declined to 52.8 in July of 2022 from 53 in June, beating market forecasts of 52. The reading marked 26th straight month of rising factory activity but the weakest rate since June of 2020, as new order rates continue to shrink although supplier deliveries improved and prices softened to levels not seen in two years, per tradingeconomics (read: 3 Sector ETFs Look Decent In Light of U.S. Manufacturing Data ).
Why Value?
If Fed continues to hike rates in the coming days to contain inflation, we may end up seeing in an uptick in bond yields, which should bode well for value securities. Secondly, value securities that were battered in the peak of the COVID-19 outbreak should now be up for a rally.
Small Cap Value ETFs in Focus
Against this backdrop, below we highlight a few small-cap value ETFs that can be tapped at the current level.
iShares S&P SmallCap 600 Value ETF (IJS)
The underlying S&P SmallCap 600 Value Index measures the performance of the small-capitalization value sector of the U.S. equity market. The fund charges 18 bps in fees and yields 1.62% annually.
The underlying S&P Small Cap 600 Value Index measures the performance of the small-capitalization value sector in the U.S. equity market. The fund charges 15 bps in fees and yields 1.81 annually.
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 invests in a broad set of U.S. small-cap companies and is designed to increase expected returns by focusing on firms trading at what we believe are low valuations with higher profitability ratios. The fund charges 25 bps in fees and yields 1.43% annually.
The underlying Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. The product charges 15 bps in fees and yields 1.87% annually.
iShares U.S. Small Cap Value Factor ETF (SVAL - Free Report)
The underlying Russell 2000 Focused Value Select Index measures the performance of small-capitalization U.S. companies with prominent value factor characteristics. The product charges 20 bps in fees and yields 2.33% annually.
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Guide to Small-Cap Value ETF Investing
The U.S. small-cap index the Russell 2000 has outperformed its bigger peer equity gauges by wide margin past month (as of Aug 24, 2022). The Russell 2000 (up 6.2% past month) clearly has beaten the S&P 500 (up 5.5%), the Dow Jones (up 2.9%) and the Nasdaq Composite (up 5.1%).
The potential of small-caps looks even brighter as these have less domestic exposure and outperform in a rising greenback environment. The U.S. dollar ETF (UUP - Free Report) is hovering around a 52-week high and has gained 13.3% this year on faster and fatter Fed rate hikes.
Cheaper Valuation of Small-Caps
Small-caps are cheaper than large-caps. The Russell 2000 has dropped 13.8% in 2022 despite recent rally, compared with the S&P 500’s 13% decline. However, many investors are believing that markets have priced in the economic recession. Citi U.S. equity strategists wrote “stocks down the market cap spectrum appear closer to pricing in recession than their Large Cap peers," as quoted on Reuters.
Decent Earnings Picture of Small-Caps
Per Zacks Earnings Trends issued on Aug 24, 2022, the S&P 500 earnings are projected to grow 6.7% in Q2 on 14% higher revenues. This increment in earnings will follow a 9.8% increase in Q1. Revenue growth in Q1 was 13.6%.
Looking at Q2 as a whole for the small-cap index, total earnings are expected to be up 12.1% from the same period last year on 20.6% higher revenues. The growth in earnings will follow a 24.9% expansion in Q1. Revenue growth in Q1 was 21.5% (read: Small-Cap Sector ETFs to Tap In Light of Q2 Earnings).
Decent Economic Indicators, Though Not Great
U.S. retail sales unexpectedly stalled in July of 2022, disappointing markets that expected a 0.1% increase as sales dropped at gasoline stations and car dealers. On the other hand, sales at non-store retailers jumped 2.7% thanks toAmazon’s Prime Day event on July 12 and 13.
On Aug 1, 2022, the ISM Manufacturing PMI declined to 52.8 in July of 2022 from 53 in June, beating market forecasts of 52. The reading marked 26th straight month of rising factory activity but the weakest rate since June of 2020, as new order rates continue to shrink although supplier deliveries improved and prices softened to levels not seen in two years, per tradingeconomics (read: 3 Sector ETFs Look Decent In Light of U.S. Manufacturing Data ).
Why Value?
If Fed continues to hike rates in the coming days to contain inflation, we may end up seeing in an uptick in bond yields, which should bode well for value securities. Secondly, value securities that were battered in the peak of the COVID-19 outbreak should now be up for a rally.
Small Cap Value ETFs in Focus
Against this backdrop, below we highlight a few small-cap value ETFs that can be tapped at the current level.
iShares S&P SmallCap 600 Value ETF (IJS)
The underlying S&P SmallCap 600 Value Index measures the performance of the small-capitalization value sector of the U.S. equity market. The fund charges 18 bps in fees and yields 1.62% annually.
SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report)
The underlying S&P Small Cap 600 Value Index measures the performance of the small-capitalization value sector in the U.S. equity market. The fund charges 15 bps in fees and yields 1.81 annually.
Avantis U.S. Small Cap Value ETF (AVUV - Free Report)
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 invests in a broad set of U.S. small-cap companies and is designed to increase expected returns by focusing on firms trading at what we believe are low valuations with higher profitability ratios. The fund charges 25 bps in fees and yields 1.43% annually.
Vanguard Russell 2000 Value ETF (VTWV - Free Report)
The underlying Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. The product charges 15 bps in fees and yields 1.87% annually.
iShares U.S. Small Cap Value Factor ETF (SVAL - Free Report)
The underlying Russell 2000 Focused Value Select Index measures the performance of small-capitalization U.S. companies with prominent value factor characteristics. The product charges 20 bps in fees and yields 2.33% annually.