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US Small Business Optimism Hits Record High: 5 ETF Picks

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While the large cap and tech stocks are grabbing headlines, small cap stocks seem to be best positioned this year amid the ongoing tit-for-tat tariff trade war and a booming economy. This is reflected in the measure of optimism among U.S. small-business owners, which touched a record on highest capital spending since 2007 and all-time high hiring.

The latest survey from the National Federation of Independent Business revealed that sentiment index rose 108.8 in August — the highest since tracking began in 1974 — and exceeded the prior high achieved in September 1983.

A combination of favorable factors drove the index higher. The historic tax cuts are benefitting small-cap companies most than their large and mid-cap counterparts. Also, the strong sentiments in the space were backed by an encouraging domestic economic trend. The U.S. economy is currently witnessing the fastest pace of growth in nearly four years, with a nearly two-decade low unemployment rate of 3.9% and an 18-year high consumer confidence rate. As the pint-sized firms are closely tied to the U.S. economy and do not have much exposure to the international market, these generally benefit from an improving American economy (read: August Wage Growth Hits 9-Year High: ETFs & Stocks to Surge).

Additionally, small-cap stocks are well insulated from international headwinds including trade war fears, emerging market troubles 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.

Given the solid momentum in the space, we have highlighted a few top-ranked ETFs that have outperformed in the past month and could be better plays going forward (see: all the small cap ETFs here).

First Trust Small Cap Growth AlphaDEX Fund FYC

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 amassed $470.1 million in its asset base and trade in average daily volume of 71,000 shares. The ETF charges 70 bps in annual fees and has risen 4.8% in the past month. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

iShares Morningstar Small-Cap Growth ETF JKK

This ETF follows the Morningstar Small Growth Index and holds 251 securities in its basket with none accounting for more than 1.22% of the assets. Information technology accounts for the largest share of 30.7% 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 5,000 shares a day. It has amassed $214 million in its asset base and gained 4.4% in a month. JKK has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Small-Cap ETFs in Focus on Trade Woes, Solid Economic Data).

Vanguard Russell 2000 Growth Index ETF VTWG

This fund follows the Russell 2000 Growth Index, providing diversified exposure to a broad basket of 1,392 stocks as none of these holds more than 1.1% of the assets. About one-fourth of the portfolio is allotted to health care while consumer discretionary, producer durables, technology, and financial services also take double-digit exposure each. The product has amassed $324.1 million in its asset base while volume is light at 11,000 shares a day on average. It charges 20 bps in annual fees and has returned 3.2% in a month. The fund has a Zacks ETF Rank #2 with a Medium risk outlook.

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 $11.3 billion and average trading volume of 773,000 shares a day. The fund provides exposure to a broad basket of 1,210 stocks by tracking the Russell 2000 Growth Index. It is well spread out across components as none of these holds more than 0.62% of the assets. Sector wise, health care takes the top spot at 26.6% while information technology, industrials and consumer discretionary round of the next three spots with double-digit exposure each. The fund charges 24 bps in annual fees from investors and has added 3.1% in a month. It has a Zacks ETF Rank #1 with a High risk outlook (read: A Spread of Top-Ranked Growth ETFs Hitting All-Time Highs).

iShares S&P Small-Cap 600 Growth ETF IJT

With AUM of $7.2 billion, IJT follows the S&P SmallCap 600 Growth Index and holds a well-diversified portfolio of 334 stocks, with each security making up for no more than 1.3% of the 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 average trading volume of 148,000 shares and charges annual fees of 25 bps. The fund has gained 2.7% in a month and has a Zacks ETF Rank #1 with a Medium risk outlook.

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