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Can Small-Cap ETFs Keep Up the Winning Trend in November?

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The month of October was downbeat for Wall Street due toelection uncertainty. Failed stimulus talks, subdued tech earnings and rising coronavirus cases on the global front were the added Wall Street woes. The three major stock indexes — the S&P 500, the Dow Jones and the Nasdaq composite — lost about 3.3%, 4.7% and 3.7%, respectively, in the month.

However, surprisingly, small-cap stocks gained in October, snapping the broader market’s losing trend. The small-cap specific Russell 2000 Index gained 2% last month. Another small cap-centric index, the S&P 600, rallied 2.5% in October.

Hopes of a second round of U.S. fiscal stimulus post-election, decent consumer spending, rising virus cases beyond the border and an uptick in small-business optimism index have led to the small-cap outperformance.

Can the Rally Last in November?

The road ahead is mixed with perils and possibilities. It is beneficial for small caps that both Democrats and Republicans support another $1200 stimulus check to households. If this happens, one can expect more consumer spending and a rally in small-cap stocks that are mainly focused on domestic activities (read: Top ETF Stories of the Volatile October).

U.S. consumer spending rose more than expected in September. Consumer spending, which makes up more than two thirds of U.S. economic activity, increased 1.4% sequentially after gaining 1% in August. Economists polled by Reuters forecast a rise in 1% in consumer spending in September. U.S. GDP grew 33.1% in the third quarter, after a 31.4% slump in GDP in the second quarter. A mammoth 40.7% growth in consumer spending made up 76.3% of the GDP growth.

On Oct 13, the National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index rose 3.8 points to 104 in September from 100.2 in August. The index came in at 98.8 in July and 100.6 in June. This hints at more job openings as small-cap companies account for a considerable portion of U.S. hiring.

The earnings picture is also improving for the small-cap segment. Per the Earnings Trends issued Oct 28, 2020, the third-quarter earnings of the S&P 600 fell 25.9% year over year compared with 65.3% in the second quarter.

The trend is likely to improve ahead as the rate of decline will likely be 23.6% in the fourth quarter. Earnings growth would likely be 157.6% in the first quarter of 2021, 131.0% in the second quarter and 24.1% in the third quarter. The upcoming holiday season is also likely to provide a boost to the small-cap segment.

But then, investors should note that “decreasing benefits for millions of unemployed Americans, cooling temperatures and a resurgence in COVID-19 cases across the nation could crimp spending in the fourth quarter,” per Reuters, as quoted on CNBC. So, the outlook is mixed for the segment for the near term.

ETFs in Focus

The following small-cap ETFs have been rallying for the past one month. Most of the funds are sector-specific.

Amplify Seymour Cannabis ETF (CNBS - Free Report) – Up 11.9%

Invesco KBW Regional Banking ETF (KBWR - Free Report) – Up 11.7%

ETFMG Prime Junior Silver ETF (SILJ - Free Report) – Up 7.2%

First Trust Mid Cap Value AlphaDEX Fund (FNK - Free Report) – Up 4.8%

ALPS Medical Breakthroughs ETF (SBIO - Free Report) – Up 4.4%

ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL - Free Report) – Up 4.0%

Timothy Plan US Small Cap Core ETF (TPSC - Free Report) – Up 3.9%

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