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Should You Buy the Dip in Small-Cap ETFs Now?

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Wall Street witnessed some strength in the major stock indices on Apr 19 as investors are analyzing the earnings season and keeping track of economic data releases. The Dow Jones Industrial Average was up 1.5% on the same day. The other two indices, the S&P 500 and the Nasdaq composite, were also up 1.6% and 2.2%, respectively, in the same time frame.

The small-cap centric index, the Russell 2000, also remained strong in the period. The index gained about 2.1% on Apr 19. 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.

According to JPMorgan’s Marko Kolanovic “Both sentiment and positioning are now too bearish, in our view. While we slightly reduced our record equity allocation ... we remain constructive on equities and think that a near-term rally is likely, particularly in small-cap and high-beta market segments,” as stated in a CNBC article.

Going on, the strong labor market and recovering U.S. economy have boosted the positive market sentiments as consumer confidence also improved in March after declining for the first two months of 2022. The Conference Board's measure of consumer confidence index stands at 107.2 in March 2022 versus 105.7 in February. Moreover, March’s reading nominally surpassed the consensus estimate of 107, per a Bloomberg survey of economists. However, the metric continues to be below the pre-pandemic level of 132.6 achieved in February 2020.

The latest encouraging preliminary consumer sentiment readings for early April can also be largely attributed to the improving job market. The University of Michigan’s preliminary consumer sentiment rose to 65.7 in early April from a final reading of 59.4 last month, improving 10.6% over the prior month. The metric surpassed the market forecast of the index, coming in at 59.

March's encouraging U.S. industrial output data can largely be attributed to the improving labor market and easing pandemic conditions. Per the Fed’s recently-released data, total industrial production rose 0.9% in March. A 0.9% rise in the manufacturing output also looked encouraging. There was a 0.4% rise in utility production. Moreover, mining production witnessed a 1.7% uptick, mainly due to strength in the oil and gas sector.

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 $13.72 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 with earnings growth expectations above the average rate relative to the market. The product manages assets worth $10.07 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 $650.3 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 $15.85 billion and charges 4 bps in annual fees and expenses.