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5 Hottest Small-Cap ETFs of 2018

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The small-cap space has been on the hottest run in more than a decade and a half. This is especially true, as the S&P Small Cap 600 had a strong run from February-end through May and outpaced the larger S&P 500 by a wide 9.5% -- a three-month premium level not seen since May 2002, according to data from S&P Dow Jones Indices.

All the 11 small-cap sectors secured spots in a positive territory in May from a negative showing in February. This quick rebound marks the ninth time in history since January 1995 that the small-cap sectors went from all losing to all winning in three months or less.

The Russell 2000 Index, another indicator of small-cap stocks, has also outperformed its mid (Russell Midcap Index) and large-cap (Russell 1000 Index) cousins for the third straight month through May. This represents its longest winning streak in almost two years, according to BofA Merrill Lynch Global Research. Notably, the small-cap index gained 6% -- its biggest monthly gain since September (read: 5 Small-Cap ETFs & Stocks Crushing Russell 2000).

Another data shows that the small-cap boom has spurred inflows into ETFs exposed to the space since Trump’s election. Investors poured in about $7.5 billion in ETFs focused on small-cap stocks in May, the most since Nov 2016, according to data compiled by Bloomberg Intelligence.

Behind the Hottest Trend

There are a number of reasons for the bullishness in the space that will likely continue in the coming months. Small-cap stocks have been the biggest beneficiaries of tax cuts as these pay higher taxes than their larger rivals. Strong Q1 earnings also added to the strength. Earnings from 94.3% of the S&P 600 index capitalization are up 25.2% on 9.4% higher revenues, with 55.6% beating EPS estimates and 72.1% beating revenue estimates. Earnings and revenue growth as well as revenue surprises are notably tracking above historical periods for the small caps (read: Solid Small-Cap Earnings Put Spotlight on These Sector ETFs).

Small caps have been outperforming on encouraging domestic economic fundamentals backed by strong hiring, growing wages, higher consumer spending, rising consumer confidence and increasing manufacturing activity. This is because these pint-sized stocks are closely tied to the U.S. economy and do not have much exposure to the international market.

Additionally, these stocks are well insulated from international headwinds including trade war fears, tariff concerns and geopolitical tensions. These are considered safe and better plays if any political issue or economic turmoil creeps into the picture. Further, the strength in U.S. dollar, which makes domestic goods more expensive overseas, also supported the small-cap surge (read: Solid Data Fuels Trade of Momentum ETFs & Stocks).

Given this, there are winners in almost every corner of the small-cap space. Below we have presented five hot small-cap ETFs of the ongoing boom and will continue their outperformance.

PowerShares S&P SmallCap Healthcare Fund (PSCH - Free Report)

This fund provides exposure to the health care sector of the U.S. small cap segment by tracking the S&P SmallCap 600 Capped Health Care Index. Holding 74 securities in its basket, the fund is widely diversified across components with each holding less than 4.9% share. The ETF is relatively unpopular, having amassed $686.7 million in asset base and trading in lower volume of about 48,000 shares per day. It charges 29 bps a year from investors and has gained 30% so far this year. The fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (see: all the Small Cap ETFs here).

First Trust Small Cap Growth AlphaDEX Fund (FYC - Free Report)

This fund follows the Nasdaq AlphaDEX Small Cap Growth Index, which uses the AlphaDEX methodology to select the stock from the Nasdaq US 700 Small Cap Growth Index. It holds a well diversified portfolio of 262 stocks, with each accounting for less than 1%. The product has key holdings in healthcare with 27.9% while information technology, consumer discretionary and industrials round off the next three spots. It has amassed $269.9 million in its asset base and trade in average daily volume of 40,000 shares. The ETF charges 70 bps in annual fees and has risen 14.7% so far this year. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

SPDR S&P 600 Small Cap Growth ETF (SLYG - Free Report)
This fund targets the growth segment by tracking the S&P Small-Cap 600 Growth Index and holding 332 stocks in its portfolio. SLYG is also well diversified with none holding more than 1.33% of assets and industrials, healthcare, information technology, consumer discretionary and financials accounting for a double-digit allocation each. The ETF has been able to manage $1.9 billion in its asset base while trades in a lower volume of 40,000 shares a day on average. It charges 15 bps in annual fees and has gained 13.2% in the year-to-date time frame. SLYG has a Zacks ETF Rank #3 with a Medium risk outlook (read: Here's Why Small Cap Growth ETFs are Soaring).

Vanguard S&P Small-Cap 600 Growth ETF (VIOG - Free Report)

The ETF also follows the S&P Small-Cap 600 Growth Index. Holding 333 securities, it is well spread out across each security, with none holding more than 1.3% of assets. Healthcare, Industrials, information technology, consumer discretionary and financials are the top five sectors with double-digit allocation each. The product has managed $396.2 million in AUM and volume is weak at just 11,000 shares, suggesting additional cost beyond the expense ratio of 0.20%. The ETF is up 13% this year and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares S&P Small-Cap 600 Growth ETF (IJT - Free Report)

This fund also follows the same index and holds 332 stocks with none accounting for than 1.34% of assets. IJT has AUM of $6 billion and good average trading volume of 126,000 shares. Expense ratio comes in at 0.25%. The fund has added 13% so far this year and has a Zacks ETF Rank #3 with a Medium risk outlook (read: 5 Market-Beating Small-Cap ETFs Trading at New Highs).

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