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Should You Invest in Small-Cap ETFs Amid Recent Market Recovery?

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Wall Street witnessed some strength in the major stock indices for the week ending Feb 4. In fact, the S&P and Nasdaq Composite indices delivered their best weekly performances since December 2021 in the previous week and are up 1.5% and 2.4%, respectively. The Dow Jones Industrial Average also climbed 1.1% in the week despite losing 0.1% on Feb 4.

The small-cap centric index, the Russell 2000, also witnessed its first positive week in five, according to a CNBC article. The index also delivered its best week of 2022. This upside is being largely aided by the small-cap companies closely tied to the U.S. economy and are, therefore, well-positioned to outshine when the economy improves.

The impressive fourth-quarter earnings results have been keeping investors busy. Notably, 79% of the S&P 500 companies that have reported earnings results have surpassed analysts’ earnings estimates and 77% have beat revenue projections as of Feb 6, per a CNBC article. The earnings results are helping ease investor worries surrounding the rising supply-chain disturbances, gradually eroding the corporate profit margins.

Going on, the strong jobs report for January led to solid market optimism. The U.S. economy added 467,000 jobs in January 2022, surpassing market expectations of a rise of 150,000. The upside was largely driven by easing business restrictions amid the reopening of economies and accelerated coronavirus vaccine rollout. January figures stood out to be pleasantly surprising as the Omicron coronavirus variant weighed on the jobs market. The ADP report also showed that private companies cut 301,000 jobs.

Notably, the average workweek for all employees on private nonfarm payrolls declined by 0.2 hours to 34.5 hours in January. The average hourly earnings rose by 23 cents to $31.63. The average hourly earnings jumped by 5.7% over the past year. In January, the average hourly earnings of private-sector production and nonsupervisory employees also climbed up by 17 cents to $26.92.

In this regard, Peter Essele, head of portfolio management at Commonwealth Financial Network, has also commented that “The increase in payrolls came as a welcome sign for the economy. The increase sent confirmation to investors that rate hikes are imminent, with the first occurring in the March meeting,” as mentioned in a CNBC article.

Red-Hot Small-Cap ETFs to Keep Track Of

Investors are worried about inflationary fears, another wave of coronavirus and a slowdown in China's economy that might impact the stock market rally and the global economic recovery. Further, it is important to be noted that pint-sized stocks are highly volatile and often lead to bigger losses in a crumbling market.

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 $13.93 billion and charges 7 basis points (bps) in annual fees and expenses (read: 5 Small-Cap ETFs to Profit From the January Effect).

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 $10.03 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 $5.57 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 $2.23 billion and charges 15 bps in annual fees and expenses.