The U.S. stock market has started to feel the heat of summer in some corners. While the S&P 500 and the Dow Jones Industrial Average have seen a summer lull so far, the Russell 2000 index and Nasdaq Composite index have been burning with impressive gains of 3.6% and 3.5%, respectively, over the past one month.
Small-cap stocks seem to be the hottest investment cluster for this summer. This is especially true in the wake of escalating trade tensions between the United States and some of its key partners, and bouts of upbeat data showing encouraging domestic economic fundamentals. Both factors are acting as a major tailwind for the pint-sized stocks that 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 and tariff concerns, and are considered safe and better plays if any political issue or economic turmoil creeps into the picture (read: How to Build a Winning ETF Portfolio Amid Trade War Fears).
Further, small-caps are getting boost from the tax cut reform as stocks on the Russell 2000 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%.
The bullish trend is likely to continue for the rest of summer. As such, investors could smartly ride out the booming trends in the small-cap space through a number of ETFs but looking at the Zacks ETF Rank could help us to pick the likely best.
The system looks to take into account a variety of factors, such as industry outlook and expert surveys; and then apply ETF-specific factors (like expense ratios and bid/ask spreads) in order to find the best funds in each segment. Using this system, we have found a handful of ETFs in the space that have earned themselves a Zacks ETF Rank #1 (Strong Buy) in the latest ratings update, and could thus outperform.
All these funds have deep focus on growth securities, which allow investors to earn more returns. Growth investing is basically a momentum play, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged uptrend). Stocks in the growth ETF portfolio harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices. As such, growth funds tend to outperform during an uptrend (read: 5 Market-Beating Small-Cap ETFs Trading at New Highs).
Below we have highlighted six such ETFs that have seen their Rank surging to the top hierarchy from #3 (Hold) and could thus make great summer picks. These funds have gained at least 4% in a month.
iShares Russell 2000 Growth ETF (IWO - Free Report)
This is one of the popular and liquid ETFs in the small-cap space with AUM of $11.2 billion and average trading volume of 576,000 shares a day. The fund provides exposure to a broad basket of 1,224 stocks by tracking the Russell 2000 Growth Index. It is well spread out across components as none of these holds more than 0.5% of assets. Sector wise, health care takes the top spot at 26.8% while information technology, industrials and consumer discretionary round off the next three spots with double-digit allocation. The fund charges 24 bps in annual fees from investors.
Vanguard Small-Cap Growth ETF (VBK - Free Report)
This ETF tracks the CRSP US Small Cap Growth Index, holding 675 securities in its basket. The fund is widely diversified across a number of sectors and securities. Industrials, financials, technology, health care, and consumer services make up for double-digit allocation each and none of the securities holds more than 0.8% of total assets in the basket. The product has amassed $8.5 billion in its asset base while trades in solid volume of around 145,000 shares. VBK charges 7 bps in fees per year.
iShares S&P Small-Cap 600 Growth ETF (IJT - Free Report)
This fund follows the S&P SmallCap 600 Growth Index and holds a well-diversified portfolio of 332 stocks, with each security making up for no more than 1.1% of assets. Further, it is well spread across various sectors with industrials, healthcare, information technology, financials, and consumer discretionary accounting for a double-digit allocation each. IJT has AUM of $6.3 billion and average trading volume of 131,000 shares. Expense ratio comes in at 0.25%. The fund has gained 4% in a month (read: 5 Hottest Small-Cap ETFs of 2018).
SPDR S&P 600 Small Cap Growth ETF (SLYG - Free Report)
This fund follows the S&P Small-Cap 600 Growth Index and holds 333 stocks in its portfolio. It is also well diversified with none accounting for more than 1.1% of assets and industrials, healthcare, information technology, consumer discretionary and financials taking a double-digit allocation each. The ETF has been able to manage $2 billion in its asset base while trades in a good volume of 169,000 shares a day on average. It charges 15 bps in annual fees.
Invesco S&P SmallCap 600 Pure Growth ETF (RZG - Free Report)
This fund tracks the S&P SmallCap 600 Pure Growth Index, charging investors 35 bps in annual fees. Holding 140 securities in its basket, it is well spread out across components with each holding no more than 2% share. Healthcare, information technology, consumer discretionary and industrials are the top four sectors with double-digit allocation each. The fund has amassed $296.8 million in its asset base while trades in light volume of about 12,000 shares a day on average (see: all the Small Cap ETFs here).
Vanguard S&P Small-Cap 600 Growth ETF (VIOG - Free Report)
The ETF tracks the S&P Small-Cap 600 Growth Index. Holding 332 securities, the fund is well spread out across each security with none holding more than 1.5% of assets. Healthcare, industrials, information technology, consumer discretionary and financials are the top five sectors with a double-digit allocation each. The product has managed $431.3 million in AUM and volume is rather weak at just 12,000 shares, suggesting additional cost beyond the expense ratio of 0.20%.
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