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Small-cap stocks outperformed major U.S. stock market indices on Aug. 12, buoyed by a softer-than-expected inflation report. The Russell 2000 Index gained nearly 3%, its biggest one-day rally since May and the ultra-popular iShares Russell 2000 ETF (IWM - Free Report) also jumped about 3%.
While several ETFs rode this momentum, we have highlighted five that led the space higher on the day. These are Invesco S&P SmallCap Industrials ETF (PSCI - Free Report) , Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) , Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) , Invesco S&P SmallCap Quality ETF (XSHQ - Free Report) and First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) .
The Consumer Price Index rose 2.7% year over year in July, slightly below the 2.8% forecast, while core inflation (excluding food and energy) accelerated to 3.1% from June’s 2.9%. The soft data has bolstered the case for Fed rate cuts in September. Per the CME Group, futures markets were pricing in a 94% chance of a quarter-point cut at next month’s Fed meeting, compared with about 85% before the inflation data (read: Less-Than-Expected Inflation in July: Growth ETFs to Gain?).
As pint-sized companies have a higher debt burden (mostly at floating rates), lower rates lead to reduced borrowing costs, helping small businesses expand their operations easily and resulting in increased profitability.
Additionally, optimism among small business owners grew in July on better business conditions and expansion opportunities. The latest data from the National Federation of Independent Business (NFIB) revealed that the small business optimism index climbed to 100.3 in July - the highest level since February and slightly above the 52-year average of 98. Small businesses serve as a vital barometer of the U.S. economy. The rise in optimism could reflect a stabilizing business environment, offering a bullish signal for market sentiment and boding well for small-cap stocks and ETFs.
Invesco S&P SmallCap Industrials ETF offers exposure to 93 small-cap companies that are principally engaged in the business of providing industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace and defense and general manufacturing. It has amassed $132 million in its asset base and charges 29 bps in annual fees. PSCI trades in a volume of 4,000 shares and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – Up 3.7%
Invesco S&P SmallCap Information Technology ETF offers exposure to companies that are principally engaged in the business of providing information technology-related products and services, including computer hardware and software, Internet, electronics and semiconductors and communication technologies. It follows the S&P SmallCap 600 Capped Information Technology Index, holding 69 securities in its basket. Invesco S&P SmallCap Information Technology ETF has an AUM of $260 million and charges 29 bps in annual fees. It trades in an average daily volume of 11,000 shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Tech ETFs at the Forefront of the Market Rebound on Monday).
Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) – Up 3.6%
Invesco S&P SmallCap Value with Momentum ETF offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. It holds a basket of 122 stocks. Invesco S&P SmallCap Value with Momentum ETF has AUM of $548.1 million and an average daily volume of 53,000 shares. XSVM charges 36 bps in annual fees and has a Zacks ETF Rank #3 (read: Small-Cap ETFs Rally in July: Will the Momentum Continue?).
Invesco S&P SmallCap Quality ETF follows the S&P SmallCap 600 Quality Index, where securities have the highest quality score based on the average of return on equity, accruals ratio and financial leverage ratio. Holding 121 stocks in its basket, it has amassed $306.1 million and trades in an average daily volume of 73,000 shares. Invesco S&P SmallCap Quality ETF charges 29 bps in annual fees from investors.
First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) – Up 3.5%
First Trust Small Cap Value AlphaDEX Fund employs the AlphaDEX stock selection methodology to select stocks from the Nasdaq US 700 Small Cap Value Index that meet certain criteria. It tracks the Nasdaq AlphaDEX Small Cap Value Index and holds 262 stocks in its basket. First Trust Small Cap Value AlphaDEX Fund has amassed $127.3 million in its asset base and sees a lower volume of around 6,000 shares per day. It charges 72 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
Outlook Seems Promising
Attractive Valuations
Large-cap valuations have stretched after a long rally, while small-caps remain relatively discounted. Institutional investors are increasingly rotating out of crowded mega-cap trades into under-owned segments like small-caps, a trend that has accelerated in recent weeks.
Sector Rebounds
Financials, industrials, and consumer discretionary stocks, together accounting for over half of the Russell 2000, are seeing strong rebounds. Regional banks, hit hard in 2023–24 by rate volatility and commercial real estate stress, are stabilizing as credit risks recede. Manufacturing and transportation names are also benefiting from improved supply chains and infrastructure spending.
M&A Tailwinds
Dealmaking is picking up in healthcare, biotech and tech services. Large-cap companies with ample cash are targeting small and mid-sized firms for growth, given their innovative edge and lean valuations. This M&A momentum is drawing active managers and hedge funds, injecting fresh liquidity into the space.
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Small-Cap ETFs Outperform on Inflation Data
Small-cap stocks outperformed major U.S. stock market indices on Aug. 12, buoyed by a softer-than-expected inflation report. The Russell 2000 Index gained nearly 3%, its biggest one-day rally since May and the ultra-popular iShares Russell 2000 ETF (IWM - Free Report) also jumped about 3%.
While several ETFs rode this momentum, we have highlighted five that led the space higher on the day. These are Invesco S&P SmallCap Industrials ETF (PSCI - Free Report) , Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) , Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) , Invesco S&P SmallCap Quality ETF (XSHQ - Free Report) and First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) .
The Consumer Price Index rose 2.7% year over year in July, slightly below the 2.8% forecast, while core inflation (excluding food and energy) accelerated to 3.1% from June’s 2.9%. The soft data has bolstered the case for Fed rate cuts in September. Per the CME Group, futures markets were pricing in a 94% chance of a quarter-point cut at next month’s Fed meeting, compared with about 85% before the inflation data (read: Less-Than-Expected Inflation in July: Growth ETFs to Gain?).
As pint-sized companies have a higher debt burden (mostly at floating rates), lower rates lead to reduced borrowing costs, helping small businesses expand their operations easily and resulting in increased profitability.
Additionally, optimism among small business owners grew in July on better business conditions and expansion opportunities. The latest data from the National Federation of Independent Business (NFIB) revealed that the small business optimism index climbed to 100.3 in July - the highest level since February and slightly above the 52-year average of 98. Small businesses serve as a vital barometer of the U.S. economy. The rise in optimism could reflect a stabilizing business environment, offering a bullish signal for market sentiment and boding well for small-cap stocks and ETFs.
ETFs That Outperform
Invesco S&P SmallCap Industrials ETF (PSCI - Free Report) – Up 3.8%
Invesco S&P SmallCap Industrials ETF offers exposure to 93 small-cap companies that are principally engaged in the business of providing industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace and defense and general manufacturing. It has amassed $132 million in its asset base and charges 29 bps in annual fees. PSCI trades in a volume of 4,000 shares and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – Up 3.7%
Invesco S&P SmallCap Information Technology ETF offers exposure to companies that are principally engaged in the business of providing information technology-related products and services, including computer hardware and software, Internet, electronics and semiconductors and communication technologies. It follows the S&P SmallCap 600 Capped Information Technology Index, holding 69 securities in its basket. Invesco S&P SmallCap Information Technology ETF has an AUM of $260 million and charges 29 bps in annual fees. It trades in an average daily volume of 11,000 shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Tech ETFs at the Forefront of the Market Rebound on Monday).
Invesco S&P SmallCap Value with Momentum ETF (XSVM - Free Report) – Up 3.6%
Invesco S&P SmallCap Value with Momentum ETF offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. It holds a basket of 122 stocks. Invesco S&P SmallCap Value with Momentum ETF has AUM of $548.1 million and an average daily volume of 53,000 shares. XSVM charges 36 bps in annual fees and has a Zacks ETF Rank #3 (read: Small-Cap ETFs Rally in July: Will the Momentum Continue?).
Invesco S&P SmallCap Quality ETF (XSHQ - Free Report) – Up 3.6%
Invesco S&P SmallCap Quality ETF follows the S&P SmallCap 600 Quality Index, where securities have the highest quality score based on the average of return on equity, accruals ratio and financial leverage ratio. Holding 121 stocks in its basket, it has amassed $306.1 million and trades in an average daily volume of 73,000 shares. Invesco S&P SmallCap Quality ETF charges 29 bps in annual fees from investors.
First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) – Up 3.5%
First Trust Small Cap Value AlphaDEX Fund employs the AlphaDEX stock selection methodology to select stocks from the Nasdaq US 700 Small Cap Value Index that meet certain criteria. It tracks the Nasdaq AlphaDEX Small Cap Value Index and holds 262 stocks in its basket. First Trust Small Cap Value AlphaDEX Fund has amassed $127.3 million in its asset base and sees a lower volume of around 6,000 shares per day. It charges 72 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
Outlook Seems Promising
Attractive Valuations
Large-cap valuations have stretched after a long rally, while small-caps remain relatively discounted. Institutional investors are increasingly rotating out of crowded mega-cap trades into under-owned segments like small-caps, a trend that has accelerated in recent weeks.
Sector Rebounds
Financials, industrials, and consumer discretionary stocks, together accounting for over half of the Russell 2000, are seeing strong rebounds. Regional banks, hit hard in 2023–24 by rate volatility and commercial real estate stress, are stabilizing as credit risks recede. Manufacturing and transportation names are also benefiting from improved supply chains and infrastructure spending.
M&A Tailwinds
Dealmaking is picking up in healthcare, biotech and tech services. Large-cap companies with ample cash are targeting small and mid-sized firms for growth, given their innovative edge and lean valuations. This M&A momentum is drawing active managers and hedge funds, injecting fresh liquidity into the space.