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The small-cap cohort (identified by the Russell 2000) has underperformed bigger peers like the S&P 500 (up 9.3%) and the Nasdaq (down 0.9%) in the past year. The Russell 2000 ETF (IWM - Free Report) is down 12.8% in the past year. But things are taking a turn for the better for pint-sized stocks. IWM is down 1.7% past month versus a 2.7% fall in the S&P 500.
iShares Russell 2000 ETF (IWM - Free Report) , in fact, hauled in maximum assets worth $1.69 billion in the week Feb 14-Feb 18, 2022. Against this backdrop, we highlight a few reasons that point out why small-cap ETFs may rally higher in the coming days.
U.S. Economy to Gain Momentum
The American economy expanded at an annualized 6.9% sequentially in fourth-quarter 2021, much higher than 2.3% in the third quarter and well above forecasts of 5.5%. It marked the strongest GDP growth in five quarters. Vaccine boosters are available now. More companies are trying to come up with antiviral therapies. This should boost the U.S. economy in the coming days. Since small-cap stocks are more closely tied to the domestic economy, any improvement in the U.S. economy would be great for such stocks.
Russia-Ukraine Tensions
Chances of Russian incursion into Ukraine have been hitting the headlines for quite a few days now. Putin announced on Feb 22 that he would recognize the independence of Donetsk and Luhansk and signed a decree calling for forces to enter the two regions, per a CNBC article.
The United States and the U.K. announced the first tranche of sanctions on Russian financial institutions and wealthy individuals following Russia’s actions.Late Tuesday, U.S. Secretary of State Antony Blinken also said he had called off a meeting with his Russian counterpart, Foreign Minister Sergei Lavrov. Germany also halted the approval of gas pipeline Nord Stream 2 after Russia’s actions.
This explains large-cap stocks with vast global exposure may underperform due to the Russia-Ukraine tensions while small-cap stocks, known for more domestic exposure, appears to be safer.
Rising Inflation
U.S. inflation is running red-hot. The annual inflation rate in the United States accelerated to 7.5% in January of 2022, the highest since February of 1982 and well above market forecasts of 7.3%. Gold is also viewed as an inflation-hedging asset.
Small-cap stocks, which, since 2010, have topped large-cap competitors when inflation forecasts rose, according to CME Group, as quoted on the Motley Fool. Due to smaller operations, small-cap companies can deal with inflationary pressure by quickly increasing prices or changing their source goods and materials.
Plus, if lack of shipping capacity is becoming an issue now, small caps stand to gain here as these are normally domestically-focused and less dependent on the overseas backdrop as well as the huge requirement of shipping.
Upbeat Earnings
Per the Zacks Earnings Trends, for the small-cap S&P 600 Index, we now have fourth-quarter results from about 46% of the index’s total membership. Total earnings for the group members are up 29% on 18% higher revenues, with 73.2% beating earnings per share estimates and 74.6% beating revenue estimates, per the Earnings Trends issued on Feb 16, 2022.
Inexpensive Valuation
In the past year, the large-cap S&P 500 has gained about 10%, while the S&P 600 has lost 3.6%. No wonder the small-cap index, which carries a cheaper valuation, has the potential to rally when the domestic economy recovers fully. For instance, SPDR S&P 600 Small Cap ETF (SLY) has a Zacks Rank #2 (Buy) and a P/E ratio of 14.74X versus 21.7X P/E possessed by SPDR S&P 500 ETF Trust (SPY - Free Report) .
Fed to Tighten Policies
The Federal Reserve will likely enact several rate hikes this year, with the first one likely to hit the market as soon as in March. The process of QE wrap-up is also on. All such tightening measures will likely boost the strength of the greenback. Since small-cap stocks are more domestically-focused and have less foreign exposure, the cohort is less likely to be exposed to the rising greenback.
Against this backdrop, we highlight a few small-cap ETFs on high momentum right now.
ETFs in Focus
Sprott Junior Gold Miners ETF (SGDJ - Free Report) – Up 0.94% Past Month
Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) – Up 0.23% Past Month
Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) – Up 0.2% Past Month
iShares US Small Cap Value Factor ETF (SVAL - Free Report) – Up 0.1% Past Month
Avantis U.S. Small Cap Value ETF (AVUV - Free Report) – Up 0.1% Past Month
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6 Reasons to Buy Small-Cap ETFs Now
The small-cap cohort (identified by the Russell 2000) has underperformed bigger peers like the S&P 500 (up 9.3%) and the Nasdaq (down 0.9%) in the past year. The Russell 2000 ETF (IWM - Free Report) is down 12.8% in the past year. But things are taking a turn for the better for pint-sized stocks. IWM is down 1.7% past month versus a 2.7% fall in the S&P 500.
iShares Russell 2000 ETF (IWM - Free Report) , in fact, hauled in maximum assets worth $1.69 billion in the week Feb 14-Feb 18, 2022. Against this backdrop, we highlight a few reasons that point out why small-cap ETFs may rally higher in the coming days.
U.S. Economy to Gain Momentum
The American economy expanded at an annualized 6.9% sequentially in fourth-quarter 2021, much higher than 2.3% in the third quarter and well above forecasts of 5.5%. It marked the strongest GDP growth in five quarters. Vaccine boosters are available now. More companies are trying to come up with antiviral therapies. This should boost the U.S. economy in the coming days. Since small-cap stocks are more closely tied to the domestic economy, any improvement in the U.S. economy would be great for such stocks.
Russia-Ukraine Tensions
Chances of Russian incursion into Ukraine have been hitting the headlines for quite a few days now. Putin announced on Feb 22 that he would recognize the independence of Donetsk and Luhansk and signed a decree calling for forces to enter the two regions, per a CNBC article.
The United States and the U.K. announced the first tranche of sanctions on Russian financial institutions and wealthy individuals following Russia’s actions.Late Tuesday, U.S. Secretary of State Antony Blinken also said he had called off a meeting with his Russian counterpart, Foreign Minister Sergei Lavrov. Germany also halted the approval of gas pipeline Nord Stream 2 after Russia’s actions.
This explains large-cap stocks with vast global exposure may underperform due to the Russia-Ukraine tensions while small-cap stocks, known for more domestic exposure, appears to be safer.
Rising Inflation
U.S. inflation is running red-hot. The annual inflation rate in the United States accelerated to 7.5% in January of 2022, the highest since February of 1982 and well above market forecasts of 7.3%. Gold is also viewed as an inflation-hedging asset.
Small-cap stocks, which, since 2010, have topped large-cap competitors when inflation forecasts rose, according to CME Group, as quoted on the Motley Fool. Due to smaller operations, small-cap companies can deal with inflationary pressure by quickly increasing prices or changing their source goods and materials.
Plus, if lack of shipping capacity is becoming an issue now, small caps stand to gain here as these are normally domestically-focused and less dependent on the overseas backdrop as well as the huge requirement of shipping.
Upbeat Earnings
Per the Zacks Earnings Trends, for the small-cap S&P 600 Index, we now have fourth-quarter results from about 46% of the index’s total membership. Total earnings for the group members are up 29% on 18% higher revenues, with 73.2% beating earnings per share estimates and 74.6% beating revenue estimates, per the Earnings Trends issued on Feb 16, 2022.
Inexpensive Valuation
In the past year, the large-cap S&P 500 has gained about 10%, while the S&P 600 has lost 3.6%. No wonder the small-cap index, which carries a cheaper valuation, has the potential to rally when the domestic economy recovers fully. For instance, SPDR S&P 600 Small Cap ETF (SLY) has a Zacks Rank #2 (Buy) and a P/E ratio of 14.74X versus 21.7X P/E possessed by SPDR S&P 500 ETF Trust (SPY - Free Report) .
Fed to Tighten Policies
The Federal Reserve will likely enact several rate hikes this year, with the first one likely to hit the market as soon as in March. The process of QE wrap-up is also on. All such tightening measures will likely boost the strength of the greenback. Since small-cap stocks are more domestically-focused and have less foreign exposure, the cohort is less likely to be exposed to the rising greenback.
Against this backdrop, we highlight a few small-cap ETFs on high momentum right now.
ETFs in Focus
Sprott Junior Gold Miners ETF (SGDJ - Free Report) – Up 0.94% Past Month
Pacer US Small Cap Cash Cows 100 ETF (CALF - Free Report) – Up 0.23% Past Month
Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) – Up 0.2% Past Month
iShares US Small Cap Value Factor ETF (SVAL - Free Report) – Up 0.1% Past Month
Avantis U.S. Small Cap Value ETF (AVUV - Free Report) – Up 0.1% Past Month