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Here's Why Small-Cap ETFs Deserve a Spot in Your Portfolio

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Wall Street witnessed some strength in the major stock indices in March. The Dow Jones Industrial Average is up 1.3% in the period. The other two indices, the S&P 500 and the Nasdaq composite, are also up 1.1% and 0.8%, respectively, in the same time frame.

The small-cap centric index, the Russell 2000, also remained strong in the period. The index has gained 1.7% so far in March. 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 solid U.S. economic fundamentals are believed to be boosting the sentiments of the market participants. In fact, the Federal Reserve approved a 0.25 percentage point rate hike (the first increase since December 2018) on Mar 16. The central bank also announced plans to increase interest rates six times this year, aiming to touch a consensus funds rate of 1.9% by 2022-end (per a CNBC article). This aggressive stance has been going down well with the market participants for some time as they believe it will assist in controlling the hot inflation levels over the longer term. Investors also believe that the strong U.S. economic fundamentals might have supported Fed’s decision.

The report on last week’s jobless claims also turned out to be very encouraging. According to the Labor Department report released on Mar 24, initial jobless claims of the previous week had hit the lowest level since 1969 and totaled 187,000. The figures reinforced the market participants’ confidence in the economic recovery from the pandemic-led slowdown.

Moreover, the labor market continues to improve. According to the Bureau of Labor Statistics, the U.S. economy added 678,000 jobs in February, beating economists’ expectations of 440,000 (per Dow Jones). The unemployment rate also dropped to 3.8%.

The latest release on the U.S. industrial output data also looks good amid an improving labor market and easing pandemic conditions. Per the Fed’s recently-issued data, total industrial production inched up 0.5% in February. A 1.2% rise in the manufacturing output compared favorably with the index, remaining almost flat in the last two months.

Red-Hot Small-Cap ETFs to Keep Track Of

Investors are worried about the Russia-Ukraine war crisis, the high inflation levels, the Fed’s aggressive approach to interest rate hikes and a resurgence of COVID-19 cases in China 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 $14.40 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 $11.06 billion and charges 24 bps in annual fees and expenses.

WisdomTree U.S. SmallCap Fund (EES - Free Report)

This product seeks to track the investment results of earnings-generating small-cap companies in the U.S. equity market. It manages assets worth $694.8 million and charges 38 bps in annual fees and expenses.

Schwab U.S. Small-Cap ETF (SCHA - Free Report)

The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index. The product manages assets worth $16.37 billion and charges 4 bps in annual fees and expenses.