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Small-Cap ETFs Outperforming Bigger Peers: Here's Why

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On Oct 15, the Russell 2000 Index outperformed its peer equity gauges by the widest margin since late April. This was only the sixth time that has happened since 1986, according to Dow Jones Market Data, as quoted on MarketWatch. The last time the Russell 2000 outperformed its peers by greater than 1% was Apr 28, the article noted.

The small-capitalization focused iShares Russell 2000 ETF (IWM - Free Report) was up 1.03% on Oct 15 versus 0.11% losses in SPDR S&P 500 ETF Trust (SPY - Free Report) , 0.04% decline in SPDR Dow Jones Industrial Average ETF Trust (DIA - Free Report) and 0.67% slump in the Nasdaq-100 ETF Invesco QQQ Trust (QQQ - Free Report) .

Here's Why Small-Caps Are Rallying

Since small-cap stocks are more closely tied to the domestic economy, resurgence in coronavirus cases in Europe pushed investors to the domestic land. New infections have increased across Europe in recent weeks with the onset of fall, leading authorities to start/considering re-imposing restrictions that were loosened over the summer.

Germany, Italy, Poland, Czech Republic, Belgium, the Netherlands, Spain, France and Britain are among the countries that are in vulnerable positions. France put a 9 p.m. curfew on many of its biggest cities, while London is facing new travel restrictions.

Small caps also gained on stimulus hopes. President Trump says he’ll support a bigger coronavirus relief aid package than $1.8 trillion. In recent weeks, despite postponing the stimulus talks, President Trump indicated that he wants Congress to approve a stand-alone bill that would allow a second round of $1,200 checks.

Both Democrats and Republicans have shown support for such aids, though it is still not clear if these proposals could be passed before the election. Notably, Democrats have proposed spending $2.2 trillion. The Trump administration initially called that “unserious,” but raised the offer to close to $1.6 trillion, including a $400 weekly pandemic jobless benefit. Democrats want $600 a week, per Reuters. Previously, Senate Republicans proposed $650 billion in total aid but later raised the bar.

This means whoever wins the election in November, there will be some sort of stimulus, which will boost small-cap stocks. Moreover, small-caps are likely to gain ahead irrespective of a Trump or Biden administration.

Trump’s “America First” slogan is known to everyone. He intends to bring back foreign jobs to America, which is favorable for small-cap U.S. stocks. Meanwhile, Joe Biden is proposing comprehensive new uses of the federal government’s regulatory and spending power to bolster U.S. manufacturing and technology firms (read: Trump or Biden, Small-Cap Stocks & ETFs to Gain).

If this was not enough, an economic forecast by Moody's indicated that a Biden presidency would generate seven million more jobs compared to a second Trump term, as quoted on Business Insider. Household incomes would also increase about $5,000 under Biden but stay unaffected if Trump is reelected to another term, per the article. If this happens, small-cap U.S. stocks will be hugely benefited.

Wining ETFs

Below we highlight some of the top-performing ETFs of the past week (as of Oct 15, 2020).

Invesco S&P SmallCap Momentum ETF (XSMO - Free Report) – Up 2.6%

iShares Morningstar Small-Cap Growth ETF – Up 2.3%

Vanguard Russell 2000 Growth ETF (VTWG) – Up 1.3%

iShares Russell 2000 Growth ETF (IWO - Free Report) – Up 1.2%

Vanguard Small Cap Growth ETF (VBK - Free Report) – Up 1.2%

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