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Grab Small-Cap ETFs to Ride the Current Market Optimism

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Wall Street continues to cheer the upbeat earnings season following a fantastic October rally. The three major stock indexes — the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite — surged 5.8%, 6.9% and 7.3%, respectively, in October. The S&P 500 and the Nasdaq Composite witnessed the best month since November 2020, while the Dow Jones Industrial Average recorded the monthly performance since March 2021. All the three major averages have now closed at a record for the third trading session in a row on Nov 2.

The small-cap centric index, the Russell 2000, also closed at an all-time high level by gaining 0.2% on Nov 2. This upside is being largely aided by the small-cap companies that are closely tied to the U.S. economy and are, therefore, well positioned to outshine when the economy improves.

The impressive third-quarter earnings results have been keeping investors busy. Notably, 83% of the S&P 500 companies that have reported earnings results have surpassed analysts’ earnings estimates as of Nov 2, per the FactSet data (according to a CNBC article). The earnings results have also wiped off investors worries surrounding the rising supply-chain disturbances gradually eroding the corporate profit margins.

In this regard, Jim Paulsen, chief investment strategist for the Leuthold Group, has also said that “Fundamentals are probably at the epicenter of why the stock market keeps rising. The earnings season overall is turning out to be much stronger than anticipated. While many companies are warning that supply restrictions are a problem, most have nonetheless been able to raise prices, maintain strong profit margins, and take full advantage of healthy demand with greater sales results. Fears of overwhelming profit margin erosion simply did not happen,” as mentioned in a CNBC article.

Going on, consumer confidence in the United States rose in October primarily on the heels of easing Delta variant concerns, improving labor market conditions, rebounding U.S. economy from the pandemic-led slump and accelerated coronavirus vaccine rollouts. The Conference Board's measure of consumer confidence index stands at 113.8 in comparison to 109.8 in September. The metric has finally broken the streak of three consecutive monthly declines. October’s reading also beat the consensus estimate of the metric, coming in at 108.3, per a Reuters’ poll. The metric continues to be below the pre-pandemic level of 132.6 in February 2020 (read: ETFs to Gain as US Consumer Confidence Rises in October).

Consumers seem to be looking to buy homes, motor vehicles and major household durables. In fact, the buying attitude for vehicles and homes is expanding. The survey also showed that the proportion of the population planning to go on vacation has shot up to the highest level since February 2020, as mentioned in a Reuters article.

Red-Hot Small-Cap ETFs to Consider

For investors looking to capitalize on this opportunity, the following small-cap ETFs could be strong pure plays:

Vanguard Small-Cap Growth ETF (VBK - Free Report)

This fund follows the CRSP US Small Cap Growth Index. The product manages assets worth $16.91 billion and charges 7 basis points (bps) in annual fees and expenses.

iShares Russell 2000 Growth ETF (IWO - Free Report)

This fund tracks the Russell 2000 Growth Index and offers exposure to small-cap companies that have earnings growth expectations above the average rate relative to the market. The product manages assets worth $12.17 billion and charges 24 bps in annual fees and expenses.

iShares S&P Small-Cap 600 Growth ETF (IJT - Free Report)

This product tracks the S&P SmallCap 600 Growth Index. It manages assets worth $6.13 billion and charges 18 bps in annual fees and expenses.

SPDR S&P 600 Small Cap Growth ETF (SLYG - Free Report)

This ETF follows the S&P SmallCap 600 Growth Index, which comprises stocks that exhibit the strongest growth characteristics based on sales growth, earnings change to price and momentum. The product manages assets worth $2.38 billion and charges 15 bps in annual fees and expenses.