Since Trump’s election a year ago, the stock market has been on a spectacular rally. While gains are broad-based, small caps are clearly outperforming. This is especially true as the Russell 2000 index has gained 24% in a year compared with a gain of 21.3% for both the S&P 500 and S&P Mid Cap 400.
Trump trade resurgence with renewed hopes of tax reform in recent months has turned the fate of small-cap stocks, which were lagging in the first half of the year as Trump’s pro-growth policies were stalled or stuck in a political gridlock. This is because small caps with a median effective tax rate of 31.9% are the biggest beneficiaries of Trump’s tax cut plans. In comparison, the larger, multi-national companies on the S&P 500 pay a lower median effective tax rate of 28% while the tax rate for 30 mega-cap stocks on the Dow Jones Industrial Average is even lower at 23.8% (read: ). 5 Biggest ETF Winners of Trump Trade Resurgence Notably, Senate has passed the $1.4 trillion budget resolution that paves the way for tax cuts later this year or early next year. Additionally, the escalation of North Korea tension in August and September as well as political uncertainty in Europe following the vote in Catalonia has added to the strength in small-cap stocks. Notably, the small cap stocks are free from the clutches of any political malaise. Further, growth in the U.S. economy has been accelerating with GDP growth expanding 3% annually in the third quarter following 3.1% growth in the second quarter. This represents the best back-to-back quarters of at least 3% growth since 2014. Unemployment dropped to the lowest level since December 2000 to 4.1%. Americans also have an optimistic view of the economy with confidence hitting the highest level in almost 17 years. The Conference Board consumer confidence index jumped to 125.9 in October from a revised 120.6 in September. Meanwhile, consumer spending, which accounts for more than two-thirds of U.S. economic activity, recorded its biggest increase in more than eight years in September. Against such a backdrop, small-cap stocks are the biggest beneficiaries as these are closely tied to the U.S. economy and do not have much exposure to the international market. These pint-sized stocks generate most of their revenues from the domestic market and generally outperform on an improving American economic health. Moreover, after hiking rates in December 2015 and December 2016, the Fed has raised interest rates two times this year and looks to hike rates again later this year. This indicates a stronger economy and is in turn propelling small-cap stocks higher (read: ). Fed to Hike in December? Buy Quality ETFs While there have been winners in every corner of the small-cap space, several ETFs have easily crushed the returns of the Russell 2000 index since Trump’s win. Below we have presented a bunch of those that will continue to outperform in the coming months given that these have potentially superior weighting methodologies and a solid Zacks ETF Rank #2 (Buy). First Trust Small Cap Growth AlphaDEX Fund FYC – Up 31.9% This fund provides a slightly active choice as it uses the AlphaDEX methodology to select the stock. This approach results in a basket of 262 stocks, which are widely spread across securities with each holding less than 0.9% share. From a sector look, information technology takes the top spot at 24.9% while health care, industrials, financials, and consumer discretionary also receive double-digit exposure each. The product has $145.2 million in AUM and charges 70 bps in annual fees. Volume is paltry with 24,000 shares exchanged a day on average. iShares Morningstar Small-Cap Growth ETF JKK – Up 30.4% 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 254 securities in its basket with none accounting for more than 1.44% of assets. Information technology accounts for the largest share of 33.8% while healthcare, industrials, and consumer discretionary round off the next three 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 $138.6 million in its asset base (read: ). Three Reasons to Bet on Small Cap ETFs Now iShares Russell 2000 Growth ETF IWO – Up 29.9% This is one of the popular and liquid ETFs in the small-cap space with AUM of $8.7 billion and average trading volume of 500,000 shares a day. The fund provides exposure to a broad basket of 1,161 stocks, earnings of which are expected to grow at an above-average rate relative to the market by tracking the Russell 2000 Growth Index. It is well spread out across components as none of these holds more than 0.7% of assets. Sector wise, information technology and health care take the top two spots at 24.8% and 23.2%, respectively, leaving a decent allocation for the others. The fund charges 24 bps in annual fees from investors. Guggenheim S&P SmallCap 600 Pure Growth ETF RZG – Up 29.9% This fund tracks the S&P SmallCap 600 Pure Growth Index, charging investors 35 bps in annual fees. Holding 147 securities in its basket, it is well spread out across components with each holding less than 2.8% share. Information technology, consumer discretionary, industrials, healthcare and financials are the top five sectors with a double-digit allocation each. The fund has amassed $230.8 million in its asset base while trades in light volume of about 11,000 shares a day on average (see: ). all the Small Cap ETFs here Vanguard Russell 2000 Growth Index ETF ( VTWG Quick Quote VTWG - Free Report) – Up 29.7% This fund follows the Russell 2000 Growth Index. It provides diversified exposure to a broad basket of 1,184 stocks as none of these holds more than 0.8% of assets. About one-fourth of the portfolio is allotted to healthcare while technology, producer durables, consumer discretionary and financial services also take double-digit exposure each. The product has amassed $210.8 million in its asset base while volume is light at 10,000 shares a day on average. Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>