In the recently skyrocketing stock market, small caps have been at the forefront of the rally. This is especially true, as the availability of vaccines will lead to the end of the pandemic and swift economic recovery. As small-cap companies are closely tied to the U.S. economy, these outperform on improving American economic health.
Coronavirus immunization has started in America with more vaccines on the way. Pfizer’s ( PFE Quick Quote PFE - Free Report) first shots, developed in collaboration with the German biotechnology company BioNTech ( BNTX Quick Quote BNTX - Free Report) is being inoculated to health workers and nursing home residents. The FDA authorized the emergency use in people aged 16 and older early this month. Another company — Moderna ( MRNA Quick Quote MRNA - Free Report) — has also received FDA authorization for emergency use against COVID-19 in individuals 18 years of age or older (read: 5 Best Small-Cap ETFs as Russell 2000 Tops S&P 500 YTD). Additionally, the super-easy monetary policy has been driving the small-cap rally. Fed Chairman Jerome Powell pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. A low interest rate bodes well for small-cap stocks as it pushes up economic activities and results in higher spending, thus boosting domestically focused companies. Increased optimism on further fiscal stimulus added to the strength. Democratic and Republican leaders reached an agreement on the new coronavirus relief package of $900 billion, which includes a round of $600 direct payments, funding for the Paycheck Protection Program, and a $300 per week unemployment compensation supplement. The bill will soon be voted on in the House and the Senate. The rollout of coronavirus vaccine will help the world's economy bounce back in 2021, compelling the agencies to lift the growth outlook. The Organization for Economic Co-operation and Development has raised global GDP forecast to 5.2% from 4.9% for the next year after an estimated 4% decline in 2020. Fitch has lifted the 2021 global growth forecast to 5.3% from 5.2% with stronger growth in the second half. The Federal Reserve revised its GDP growth forecast to 4.2% from 4%. As the economy seems on track for strong growth, a small-cap rally is expected to strengthen in the New Year. As such, we have presented five ETFs from the space that looks to outperform given that they have superior fundamentals. These funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy) and are among the popular choices (read: 10 Top-Ranked ETFs That Have Outperformed in 2020). iShares Core S&P Small-Cap ETF ( IJR Quick Quote IJR - Free Report) This fund offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. It holds 601 stocks in its basket with none accounting for more than 0.9% of assets. Industrials, financials, consumer discretionary, information technology and healthcare are the top five sectors with a double-digit exposure each. The ETF has AUM of $55 billion and trades in an average daily volume of 4.1 million shares. It charges investors 6 bps in annual fees and is up 10% so far this year. The product has a Zacks ETF Rank #2 (read: Small-Cap ETFs Face Off: IWM Vs. IJR). Schwab U.S. Small-Cap ETF ( SCHA Quick Quote SCHA - Free Report) This product offers exposure to the 1749 small-cap stocks and tracks the Dow Jones U.S. Small-Cap Total Stock Market Index. No single firm holds more than 0.4% of total fund assets. The product is widely spread across sectors with health care, industrials, financials, information technology and consumer discretionary having double-digit exposure each. The product has AUM of $12.7 billion and sees solid volume of more than 425,000 shares a day. It has an expense ratio of 0.04% and has a Zacks ETF Rank #2. The ETF has surged 19% so far this year. Vanguard Small-Cap Growth ETF ( VBK Quick Quote VBK - Free Report) This ETF targets the growth corner of the small-cap space and follows the CRSP US Small Cap Growth Index. It has amassed $15.2 billion in its asset base and holds 592 securities in its basket with none accounting for more than 1% share. From a sector look, technology, healthcare, industrials, and consumer discretionary make up for a double-digit allocation each. The fund charges 7 bps in fees per year and trades in an average daily volume of 195,000 shares. It has gained 35.1% so far this year and has a Zacks ETF Rank #1 (read: Small Cap ETFs Deliver Big Gains for Investors). iShares Russell 2000 Growth ETF ( IWO Quick Quote IWO - Free Report) This ETF tracks the Russell 2000 Growth Index, holding 1090 securities in its basket with each making up for less than 1% of assets. It is tilted toward healthcare at 34.4% share while information technology, consumer discretionary, and industrials round off the next spots with double-digit exposure each. With AUM of $11.5 billion, the product charges 24 bps in fees per year and trades in an average daily volume of 411,000 shares. The fund has soared 35% so far this year and has a Zacks ETF Rank #1. iShares S&P Small-Cap 600 Growth ETF ( IJT Quick Quote IJT - Free Report) With AUM of $5.2 billion, IJT follows the S&P SmallCap 600 Growth Index and holds a well-diversified portfolio of 341 stocks, with each security making up for no more than 1.3% of the assets. Further, it is well spread across various sectors with information technology, industrials, consumer discretionary, healthcare and financials accounting for a double-digit allocation each. IJT has an average trading volume of 157,000 shares and charges annual fees of 18 bps. The fund has gained 18.2% so far this year and has a Zacks ETF Rank #2. 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 >>