Small-caps are off to a great start this year, clearly outperforming their larger counterparts. iShares Russell 2000 ETF (IWM - Free Report) is up 7.3% so far this year (as of Jan 10, 2019) compared with 3.6% of the S&P 500 and 5.3% advancement of the Nasdaq composite (read: Risk-On Trade is Back: ETFs That Gained the Most).
And why not? Fundamentals are in favor of small-caps, at least for the near term. The U.S. economy has been in great shape compared with several other developed economies. The latest jobs data corroborate the fact.
Let’s see which factors should propel small-cap growth ETFs higher in the near term.
Upbeat U.S. Economy
U.S. employers added 312,000 new jobs in December, after an upwardly revised 176,000 in November. The number breezed past market expectations of 177,000. The December jobs gain took total U.S. employment to above 150 million for the first time.
On the basis of this chartbuster number, Atlanta Federal Reserve lately upgraded its forecast for Q4 GDP data to 2.8%from 2.6%. The latest forecasts for fourth-quarter real consumer spending growth and real private fixed investment growth rose to 3.8% and 2.8% from 3.6% and 2.4%, respectively.
Dovish Fed Minutes
Fed chair Jerome Powell set a much-desired dovish tone. In fact, the latest Fed minutes show that the Fed will be flexible on policy, including balance sheet and is in no hurry to hike rates. Powell assured to take the downside risks of Fed policy tightening into consideration in future meetings.
Investors should also note that the Fed had lowered its interest rate forecast for 2019 to two hikes from three.Since several market participants including analysts at Rabobank believe that the implied probability of a Fed rate hike in March is now zero and recessionary fears are out of picture as of now, small-cap stocks should not suffer from rising rate worries in the current backdrop.
Double-Digit Earnings Growth Expectations for 2019
On the earnings front, analysts expect small-cap companies in the Russell 2000 index to record double-digit profit gains in 2019, per financial data provider Refinitiv, as quoted on Wall Street Journal. The earnings growth prospect clearly beats the S&P 500.
Profits from the Russell 2000 are estimated to increase about 16% in Q1 of 2019 from 12.6% expected growth in Q4 of 2018. Per Earnings Trends issued on Jan 9, 2019, the small-cap index S&P 600 is expected to log 5.1% growth rate in the Q4 and 7.9% in the first quarter of 2019. And the S&P 500 is expected see earnings growth of 10.7% in Q4 and 1.9% in Q1 of 2019, per Earnings Trends.
The last year was lackluster for small-caps, which underperformed the larger-cap indexes. December was the worst month ever for Russell 2000, which lost 12% and entered the bear market. The index also registered its worst annual performance since 2008 financial crisis, per Wall Street Journal.
The selloff brought valuations of the constituent companies to relatively cheaper level. According to Factset, valuation of pint-sized stocks slipped to their lowest level in six years as well as below the S&P 500, as quoted on Wall Street Journal.
Given this, we highlight some top-ranked small-cap growth ETFs that should do well in the coming days.
Invesco Russell 2000 Pure Growth ETF (PXSG - Free Report)
The 307-stock fund focuses mainly on Healthcare (29.05%) and Information Technology (24.3%). Industrials (16.6%) and Consumer Discretionary (13.85%) also have double-digit weight. The fund charges 39 bps in fees.
Janus Henderson Small Cap Growth Alpha ETF (JSML - Free Report)
The underlying index selects small-sized capitalization stocks that are poised for smart growth by evaluating each company’s performance in three critical areas: growth, profitability, and capital efficiency. The fund charges 35 bps in fees. This fund is also heavy on the above-mentioned sectors.
iShares S&P Small-Cap 600 Growth ETF (IJT - Free Report)
The 340-stock fund has double-digit weights in Healthcare (18.26%), Industrials (17.72%), Financials (16.32%), Consumer Discretionary (13.87%) and Information Technology (13.46%). The fund charges 25 bps in fees.
Vanguard Small-Cap Growth ETF (VBK - Free Report)
The underlying CRSP U.S. Small Cap Growth Index measures the investment return of small-capitalization growth stocks. The 644-stock fund puts double-digit weights in Consumer Services, Financials, Healthcare, Industrials and Technology. The fund charges 7 bps in fees.
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 >>