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Market on Rise: 5 Small Cap ETFs Leading The Way

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The U.S. stock market has shown some strength in recent weeks, especially following the Fed’s hawkish comments and a spate of positive economic indicators. While the S&P 500 touched new 2016 highs, small caps as represented by the Russell 2000 are leading the current rally. Though the regained momentum in the U.S. economy spread a strong air of optimism in the small cap space, Brexit fears, the Fed policy, a strong dollar and slow growth in many corners of the world continue to keep many investors away from large cap stocks.

This is especially true given that the ultra-popular small cap ETF (IWM - Free Report) has gained nearly 3.7% over the past one-month compared to a gain of about 2.2% for (SPY - Free Report) . The economy was off to a strong start in the second quarter after stalling in the first as inflation picked up, manufacturing stabilized and industrial production started rising. The housing market is showing signs of a spring rebound given that new home construction and building permits rebounded in April (read: Play US Recovery with These Small-Cap Blend ETFs).

In addition, retail sales jumped 1.3% in April, representing the largest gain since March 2015, buoyed by online shopping. Consumer confidence also bounced back to its strongest level in nearly a year in May, with the preliminary University of Michigan sentiment index reading 95.8, up from 89 in April. All these suggest that the world’s largest economy has regained momentum, benefiting small caps the most.  

This is because these pint-sized stocks are closely tied to the U.S. economy and generate most of their revenues from the domestic market, potentially freeing them from the clutches of a global malaise. Additionally, these stocks generally outperform when the American economy is leading the way. Further, since these companies are small, they are poised to grow more than their already tapped out large cap counterparts.

Below, we have highlighted five small cap ETFs that are easily crushing the overall market over the past one month (see: all the Small Caps ETFs here).

BioShares Biotechnology Clinical Trials Fund (BBC - Free Report)

This ETF has a novel approach to biotechnology investing as it provides exposure to companies that have a primary product in Phase I, II, or III of FDA trials by tracking the LifeSci Biotechnology Clinical Trials Index. Holding 90 small cap stocks in its basket, the fund is widely spread out as each firm holds no more than 2.7% share. The fund has accumulated $27.6 million in its asset base and charges a higher fee of 85 bps per year. It trades in a light volume of 13,000 shares a day and gained 9.5% over the past one-month period. The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating.

Global X Junior MLP ETF MLPJ

This product targets the small cap MLP segment of the energy market. It tracks the performance of the Solactive Junior MLP Composite Index and holds 31 stocks with moderate concentration across components as each holds less than 8.8% of assets. It charges 0.75% in fees per year and trades in paltry average daily volume of less than 8,000 shares. With AUM of 6.4 million, MLPJ gained 7.8% over the past one month (read: MLP ETFs--Time to Invest on Oil Rebound or Too Risky?).

PowerShares S&P SmallCap Information Technology Portfolio (PSCT - Free Report)

This fund provides exposure to the small cap technology segment by tracking the S&P SmallCap 600 Capped Information Technology Index. It has amassed $379 million in its asset base and trades in average daily volume of about 37,000 shares. The ETF charges 29 bps in fees per year from investors. Holding 97 securities in its basket, the product is well spread across securities with none holding more than 3.36% share. From an industry look, about one-fourth of the portfolio is allocated toward electronic equipment, followed by semiconductors (22.2%) and software (8.5%). The product added over 4.6% in the same time frame and has a Zacks ETF Rank of 2 or ‘Buy’ rating (read: Forget Big Tech, Focus on These ETFs Instead).

iShares Morningstar Small-Cap Growth ETF (JKK - Free Report)

This ETF offers exposure to small cap companies whose earnings are expected to grow at an above-average rate relative to the market. It follows the Morningstar Small Growth Index and holds 270 securities in its basket with none accounting for more than 1.44% of assets. Information technology accounts for the largest share of 27.3% while health care, financials, consumer discretionary, and industrials round off the top five spots. The ETF charges 30 bps in annual fees and trades in a light volume of about 3,000 shares a day. It has amassed $115.5 million in its asset base and returned about 4.4% in the same period. JKK has a Zacks ETF Rank of 3.

Guggenheim S&P SmallCap 600 Pure Growth ETF (RZG - Free Report)

This fund also targets the small cap growth segment of the broader U.S. market. It tracks the S&P SmallCap 600 Pure Growth Index, charging investors 35 bps in annual fees. Holding 142 securities in its basket, it is well spread out across components with each holding less than 2% share. Health care and financials take the top two spots with 27.2% and 21.8%, share, respectively, while industrials, information technology and consumer discretionary round off the top five with a double-digit allocation each. The fund has amassed $174.3 million in its asset base while trades in volume of about 23,000 shares a day on average. The product gained 7.2% over the past month and has a Zacks ETF Rank of 3.



Bottom Line

Small caps have lately been gaining, and should remain lucrative bets for investors for as long as global volatility persists and the U.S. economy shows improvement.

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