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A Guide to Small-Cap Value ETF Investing

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The U.S. small-cap index the Russell 2000 has outperformed its bigger peer equity gauges by wide margin this year. The Russell 2000 (up 19.5% this year) clearly has beaten the S&P 500 (up 5.7%), the Dow Jones (up 7.7%) and the Nasdaq Composite (up 4.4%). The potential of small-caps look even brighter. 

Small Caps’ Domestic Exposure to be Benefited From Stimulus & Vaccination

Since small-cap stocks are more closely tied to the domestic economy, the signing of the $1.9 trillion COVID-19 relief bill that includes $1,400 stimulus payment is a great positive for small-cap stocks. President Biden also indicated that he would make all adults eligible for vaccines by May 1.

Increasing vaccination from the likes of Pfizer-BioNTech and Modena coronavirus vaccines bode well for the small-cap stocks.Ebbing coronavirus cases amid growing vaccination pushed investors to the domestic land.

Among recent positive developments on vaccines, Novavax (NVAX - Free Report) announced very impressive update on its protein-based COVID-19 vaccine candidate, NVX-CoV2373. The company’s vaccine candidate has delivered final efficacy of 96.4% in a pivotal phase 3 trial in the U.K., against mild, moderate and severe diseases caused by the original COVID-19 strain (read: Novavax ETFs to Shine Bright on Positive Vaccine Update).

On Feb 27, the United States sanctioned Johnson & Johnson's (JNJ - Free Report) COVID-19 vaccine for emergency use, giving the nation a third shot to fight the outbreak, after BioNTech/Pfizer and Moderna (read: How to Trade USFDA's EUA to J&J Vaccine With ETFs).

Dovish Fed & Decent GDP Growth

The Fed has also indicated that it will not hike rates anytime soon as inflation levels are still tame. Low rates are especially beneficial for the pint-sized stocks. Analysts surveyed by MarketWatch now expect the U.S. economy to expand a havoc 6% in 2021.

Biden’s Win in Election

Joe Biden is proposing comprehensive new uses of the federal government’s regulatory and spending power to bolster U.S. manufacturing and technology firms. 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.

Q4 Earnings Look Quite Better Off Than Previous Quarters

Per the Earnings Scorecard issued on Mar 12, 2021, we currently have Q4 results from 551 S&P 600 players. Total earnings for these index members are up 0.6% from the same period last year on 0.7% higher revenues, with 64.8% beating EPS estimates and 75% beating revenue estimates. The proportion of these 551 S&P 600 members that have beaten both EPS and revenue estimates is 53.5%.

Overall, S&P 600 earnings are expected to be down 1.6% in Q4. Results are better than what we saw in the first three months of 2020. In Q1, Q2 and Q3 of 2020, earnings fell 66.3%, 62.5% and 6.2%, respectively. For the four quarters of 2021, small-cap S&P 600 earnings growth are expected to be 181.2%, 164.3%, 24.2% and 19.7%, respectively.

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 the COVID-19 outbreak should now be up for a rally.

Small Cap Value ETFs in Focus

Against this backdrop, below we highlight a few small-cap value ETFs that can be tapped at the current level.

iShares S&P SmallCap 600 Value ETF (IJS - Free Report)

The underlying S&P SmallCap 600 Value Index measures the performance of the small-capitalization value sector of the U.S. equity market. Financials (24.59%), Industrials (17.62%) and Consumer Discretionary (15.70%) are top three sectors of the fund. The fund charges 18 bps in fees.

SPDR S&P 600 Small Cap Value ETF (SLYV - Free Report)

The underlying S&P Small Cap 600 Value Index measures the performance of the small-capitalization value sector in the U.S. equity market. Financials (24.90%), Industrials (17.58%) and Consumer Discretionary (15.67%) are top three sectors of the fund. The fund charges 15 bps in fees.

Avantis U.S. Small Cap Value ETF (AVUV - Free Report)

The Avantis U.S. Small Cap Value ETF seeks long-term capital appreciation by investing primarily in a diverse group of U.S. small-cap companies across market sectors and industry groups. The fund invests in a broad set of U.S. small-cap companies and is designed to increase expected returns by focusing on firms trading at what we believe are low valuations with higher profitability ratios. Financials (28%), Industrials (19%) and Consumer Discretionary (18%) are the top three sectors of the fund. The fund charges 25 bps in fees.

Vanguard Russell 2000 Value ETF (VTWV - Free Report)

The underlying Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. Financials (26.01%), Consumer Discretionary (17.66%) and Industrials (16.15%) take the top three spots in the fund. The product charges 15 bps in fees.

iShares U.S. Small Cap Value Factor ETF (SVAL - Free Report)

The underlying Russell 2000 Focused Value Select Index measures the performance of small-capitalization U.S. companies with prominent value factor characteristics. Financials (41.43%), Industrials (20.72%) and Consumer Discretionary (10.84%) take the top three spots in the fund. The product charges 20 bps in fees.

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