Back to top

Image: Bigstock

Are Smaller-Cap ETFs Good Bet for September?

Read MoreHide Full Article

U.S. stocks were super steady in August as investors rotated into the beaten-down segments of the year — cyclicals. The Nasdaq 100 rose nearly 11% in August compared to a gain of about 7% for the S&P 500, 6.6% advancement in the Dow Jones and 5.5% rise for the Russell 2000. The S&P 500, in fact, enjoyed the best August in 34 years.

However, things took a radical turn from Sep 3 after the Wall Street start to skid. Some subdued economic datapoints and a monstrous rally in the high-profile tech names (that caused overvaluation concerns) led to the correction. Selloffs have been the worst in the big-shot tech stocks as the segment is recording the worst rout since March.

Among the key equity indexes, the tech-heavy Nasdaq — the real coronavirus winner — is getting punished more while the losers of the pandemic — the small-cap index Russell 2000 and the Dow Jones — lost lesser.

Hence, we don’t see the selloff as a signal of rising market fear. It is more of profit booking of the big names. In fact, the selling trend indicates that winners are emerging as the key losers now and vice versa (read: Don't Fear Correction: ETF Laggards Are Emerging Leaders).

Is This the Time for Small-Caps?

Better-than-expected second-quarter earnings results and some upbeat economic indicators led investors to shift their focus to reopening trade. Recent data points show that the outbreak is gradually coming under control, even in the hardest-hit states. Economic datapoints are coming in decent, if not great.

President Donald Trump said the United States is seeing “the fastest labor market recovery from an economic crisis in history.” He also said that a vaccine could be possible in October. His comments came on the wheels of creation of about 1.4 million jobs in August and a decline in the unemployment rate from 10.2% in July to 8.4%. About half the jobs lost during the pandemic have been recovered.

Also, the beginning of Q3 showed an improving trend in manufacturing activity in the United States. After clocking the highest reading since March 2019 in July, U.S. manufacturing activity accelerated to a nearly two-year high in August due to solid new orders (read: August U.S. Manufacturing Best in 2 Years: 5 Solid ETF Areas).

The Institute for Supply Management (ISM) said on Sep 1 that its index of national factory activity rose to a reading of 56.0 last month from 54.2 in July. This marked the highest level since November 2018 and three successive months of growth. Economists polled by Reuters had forecast that the index would rise to 54.5 in August.

Against this backdrop, small caps are poised for a rebound now as the domestic economy appears to be in decent shape and the pint-sized stocks are closely related to the health of the domestic economy.

Below we highlight a few small-cap ETFs that have been better-positioned of late. Most of these small-cap fund outperformed SPDR S&P 500 ETF Trust (SPY - Free Report) on Sep 4 and Sep 8.

First Trust Mid Cap Value AlphaDEX Fund (FNK - Free Report) – Up 0.94% on Sep 4

iShares Morningstar Small-Cap Value ETF (JKL - Free Report) ) – Up 0.75% on Sep 4

Invesco S&P MidCap 400® Pure Value ETF (RFV - Free Report) ) – Up 0.62% on Sep 4

Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) ) – Down 0.05% on Sep 4

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

Published in