Small-caps, which were lagging in the first half of the year, staged a nice comeback over the past several months on optimism over the tax reform, which is close to becoming law next year. After being passed by the Congress, the tax bill is now on its way to the White House for President Donald Trump’s signature, which is expected by this week.
The tax cut from 35% to 21% is a big boon to small caps as these pay higher taxes with a median effective tax rate of 31.9%. 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 low at 23.8% (read: 4 Sector ETFs & Stocks Set to Explode Higher on Tax Cuts).
Additionally, the strengthening economy is providing a boost to the small-cap stocks that are closely tied to the U.S. economy and do not have much exposure to the international market. Notably, the economy expanded at the fastest clip in three years in best back-to-back quarters with at least 3% GDP growth and unemployment at the lowest level of 4.1% since December 2000. Americans are highly optimistic about the economy with consumer confidence climbing to the highest level in 17 years.
The pint-sized stocks generate most of their revenues from the domestic market and generally outperform on improving American economic health. These are also free from the clutches of any political malaise.
Given this, there have been winners in many corners of the small-cap space. Below we have presented five ETFs that have easily crushed the Russell 2000 index this year and are likely to continue their strong performance heading into the New Year. These funds have a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy) (see: all the Small Cap ETFs here):
iShares Morningstar Small-Cap Growth ETF – Up 24%
This ETF follows the Morningstar Small Growth Index and holds 255 securities in its basket with none accounting for more than 1.5% of assets. Information technology accounts for the largest share of 28.4% while health care, consumer discretionary and industrials round off the next three spots with a double-digit exposure each. The ETF charges 30 bps in annual fees and trades in a light volume of about 3,000 shares a day. It has amassed $142.4 million in its asset base and has a Zacks ETF Rank #2.
Vanguard Russell 2000 Growth Index ETF VTWG – Up 22.5%
This fund follows the Russell 2000 Growth Index, providing diversified exposure to a broad basket of 1,192 stocks as none of these holds more than 0.7% of assets. About one-fourth of the portfolio is allotted to health care while technology, producer durables, consumer discretionary and financial services also take double-digit exposure each. The product has amassed $223.2 million in its asset base while volume is light at 6,000 shares a day on average. It charges 20 bps in annual fees and has a Zacks ETF Rank #2 (read: Top-Ranked ETFs That Crushed the Russell 2000 Post Election).
iShares Russell 2000 Growth ETF IWO – Up 22.4%
This is one of the popular and liquid ETFs in the small-cap space with AUM of $9.3 billion and average trading volume of 582,000 shares a day. The fund provides exposure to a broad basket of 1,178 stocks by tracking the Russell 2000 Growth Index. It is well spread out across components as none of these holds more than 0.77% of assets. Sector wise, information technology and health care take the top two spots at 24.3% and 23.4%, respectively, leaving a decent allocation for the others. The fund charges 24 bps in annual fees from investors and has a Zacks ETF Rank #2.
PowerShares S&P SmallCap Industrials Portfolio PSCI – Up 17.6%
This product follows the S&P SmallCap 600 Capped Industrials Index, which measures the performance of companies engaged in the business of providing industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace and defense and general manufacturing. The product has a basket of 103 securities, which are widely spread across as each security holds less than 2.61% share. It has AUM of $105.9 million while trades in a paltry volume of 7,000 shares. The ETF has expense ratio of 0.29% and a Zacks ETF Rank #2 (read: Industrial ETFs at All-Time Highs: Any Value Left for 2018?).
Vanguard S&P Small-Cap 600 Growth ETF VIOG
The ETF tracks the S&P Small-Cap 600 Growth Index. Holding 353 securities, the fund is well spread out across each security with none holding more than 1.2% of assets. Industrials, information technology, health care, financials and consumer discretionary are the top five sectors with double-digit allocation each. The product has managed $303 million in AUM and volume is weak at just 7,000 shares, suggesting additional cost beyond the expense ratio of 0.20%. The ETF has a Zacks ETF Rank #1 (read: 3 Small-Cap Growth ETFs Surging to #1 Rank on Holiday Fervor).
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