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Why Is This the Right Time to Bet on Small-Cap Value ETFs?
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The month of November has been upbeat for Wall Street due to vaccine hopes and chances of a divided Congress in the United States. No stimulus as yet and rising coronavirus cases are valid concerns. Still, small-cap stocks have picked up momentum, outperforming their larger cousins. In the past month (as of Nov 20, 2020), the Russell 2000 has gained about 11.3% versus 4.3% gains in the S&P 500.
Can the Rally Sustain?
Vaccine Hopes
Since small-cap stocks are more closely tied to the domestic economy, the latest hopes of a vaccine bode well for the segment. Both Pfizer and Moderna have indicated that their vaccines are about 95% effective in preventing COVID-19.On Nov 23, AstraZeneca (AZN) said its vaccine, developed in collaboration with the University of Oxford, was evaluated over two different dosing regimens.
“One showed an effectiveness of 90% when trial participants received a half dose, followed by a full dose at least one month apart. The other dosing regimen showed 62% efficacy when given as two full doses at least one month apart,” per CNBC. Overall, it showed an average 70% effectiveness.
Q4 Encompasses All-Important Holiday Quarter
As far as GDP growth is concerned, the American economy is likely to face a slowdown in the fourth quarter after massively positive changes in gross domestic product in the previous two quarters. Blistering growth is likely to plateau in the ongoing quarter. “Q4 output is projected to increase 4.1% (seasonally adjusted annual rate), based on the median nowcast via a set of estimates compiled by CapitalSpectator.com,” as quoted on a Seeking Alpha article.
Still, one should not forget that the fourth quarter, which encompasses the holiday season, is apparently up for solid online sales. Holiday gift-giving and consumers’ purchases for themselves will cause 15% growth in U.S. appliance and houseware sales this holiday, according to NPD, as quoted on Forbes.
Stimulus Hopes
On Nov 19, Treasury Secretary Steven Mnuchin “asked the Federal Reserve to shut down five emergency COVID-19 relief facilities and return $455 billion of unused funds, a move opposed by Fed Chairman Jerome Powell.”
Notably, in March, the Congress had approved a $2.2 trillion of emergency relief under the CARES Act, which included $500 billion to enact a variety of emergency lending facilities through the Fed and guarantee loans. Out of this, only a trivial portion of the funds — $25 billion — were used.
Q3 Earnings Look Quite Better Off Than Previous Quarters
Per the Earnings Trends issued on Nov 18, 2020, we currently have Q3 results from 541 S&P 600 players. Total earnings for these index members are down 2.6% from the same period last year on 4.9% lower revenues, with 75.6% beating EPS estimates and 72.8% beating revenue estimates.
Results are better than what we saw in the first half of the year. In fact, the earnings growth picture in small caps look better than large caps. The members in the S&P 500 have seen earnings falling 8.1% on a 1.2% decline in revenues.
Why Value?
If risk-on sentiments manage a continuation in Wall Street, 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 COVID-19 outbreak should now be up for a rally.
ETFs in Focus
The following small-cap value ETFs could thus be options to play right now.
Avantis U.S. Small Cap Value ETF (AVUV - Free Report) – Up 3.2% last week
iShares Morningstar Small-Cap Value ETF – Up 3.1% last week
Avantis International Small Cap Value ETF (AVDV - Free Report) – Up 3.0% last week
Vanguard Small Cap Value ETF (VBR - Free Report) – Up 2.4% last week
Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) – Up 2.3% last week
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Why Is This the Right Time to Bet on Small-Cap Value ETFs?
The month of November has been upbeat for Wall Street due to vaccine hopes and chances of a divided Congress in the United States. No stimulus as yet and rising coronavirus cases are valid concerns. Still, small-cap stocks have picked up momentum, outperforming their larger cousins. In the past month (as of Nov 20, 2020), the Russell 2000 has gained about 11.3% versus 4.3% gains in the S&P 500.
Can the Rally Sustain?
Vaccine Hopes
Since small-cap stocks are more closely tied to the domestic economy, the latest hopes of a vaccine bode well for the segment. Both Pfizer and Moderna have indicated that their vaccines are about 95% effective in preventing COVID-19.On Nov 23, AstraZeneca (AZN) said its vaccine, developed in collaboration with the University of Oxford, was evaluated over two different dosing regimens.
“One showed an effectiveness of 90% when trial participants received a half dose, followed by a full dose at least one month apart. The other dosing regimen showed 62% efficacy when given as two full doses at least one month apart,” per CNBC. Overall, it showed an average 70% effectiveness.
Q4 Encompasses All-Important Holiday Quarter
As far as GDP growth is concerned, the American economy is likely to face a slowdown in the fourth quarter after massively positive changes in gross domestic product in the previous two quarters. Blistering growth is likely to plateau in the ongoing quarter. “Q4 output is projected to increase 4.1% (seasonally adjusted annual rate), based on the median nowcast via a set of estimates compiled by CapitalSpectator.com,” as quoted on a Seeking Alpha article.
Still, one should not forget that the fourth quarter, which encompasses the holiday season, is apparently up for solid online sales. Holiday gift-giving and consumers’ purchases for themselves will cause 15% growth in U.S. appliance and houseware sales this holiday, according to NPD, as quoted on Forbes.
Stimulus Hopes
On Nov 19, Treasury Secretary Steven Mnuchin “asked the Federal Reserve to shut down five emergency COVID-19 relief facilities and return $455 billion of unused funds, a move opposed by Fed Chairman Jerome Powell.”
Notably, in March, the Congress had approved a $2.2 trillion of emergency relief under the CARES Act, which included $500 billion to enact a variety of emergency lending facilities through the Fed and guarantee loans. Out of this, only a trivial portion of the funds — $25 billion — were used.
Now Mnuchin wants to discuss a stimulus package with Democrats. Probably the unused funds will help them come up with a stimulus package. This could be a winning factor for the small caps.
Q3 Earnings Look Quite Better Off Than Previous Quarters
Per the Earnings Trends issued on Nov 18, 2020, we currently have Q3 results from 541 S&P 600 players. Total earnings for these index members are down 2.6% from the same period last year on 4.9% lower revenues, with 75.6% beating EPS estimates and 72.8% beating revenue estimates.
Results are better than what we saw in the first half of the year. In fact, the earnings growth picture in small caps look better than large caps. The members in the S&P 500 have seen earnings falling 8.1% on a 1.2% decline in revenues.
Why Value?
If risk-on sentiments manage a continuation in Wall Street, 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 COVID-19 outbreak should now be up for a rally.
ETFs in Focus
The following small-cap value ETFs could thus be options to play right now.
Avantis U.S. Small Cap Value ETF (AVUV - Free Report) – Up 3.2% last week
iShares Morningstar Small-Cap Value ETF – Up 3.1% last week
Avantis International Small Cap Value ETF (AVDV - Free Report) – Up 3.0% last week
Vanguard Small Cap Value ETF (VBR - Free Report) – Up 2.4% last week
Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) – Up 2.3% last week
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 >>