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Fed Boosts Main Street Lending: Small-Cap Growth ETFs to Buy

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From March to April, the Federal Reserve announced multiple lending facilities to fight the COVID-19 crisis and save the economy from any deepening slump (per an article on Forbes). Most of the lending programs were aimed at providing broad-based liquidity to the economy. In fact, apart from cutting rates to zero and launching QE measures, the Fed started buying corporate bonds.

Fed Broadens Main Street Lending

Most recently, the central bank expanded its Main Street Lending Program. As the name suggests, the program is designed to boost small and mid-size companies hit hard by the coronavirus-led lockdown and recession. The central bank said on Jun 8 that it is lowering the initially stated minimum loan and raising the maximum that can be borrowed. Plus, it is expanding the loan terms to five years from four years.

Under the new guidelines, the minimum loan now will be $250,000, half the amount under the previous versions of the plan. The maximum will now differ by facility but could be up to $300 million from the previous $200 million.

The changes have probably been done based on feedback received from various sources. The new program also postpones the repayment period to two years from the original one year. Interest has also been delayed for one year and will be LIBOR, a commonly used overnight lending rate, plus 3%.

Small Caps to Benefit

The Fed’s Main Street Lending Program can be considered a plus for pint-sized stocks. The U.S. government’s virus relief bill should lend further support to small-cap stocks. There is already a $349 billion forgivable loan program in place (read: Fed Goes the Extra Mile: 6 ETF Areas to Win).

Investors should note that pint-sized stocks are more linked to the domestic economy. So, the reopening of economies, a solid jobs report and some better-than-expected economic data should do wonders for this segment.

U.S. manufacturing activity recovered from an 11-year low in May, in a sign that the worst of the COVID-19 economic crisis is probably over. The consumer sector looks to be on the mend. Visa’s total U.S. payments volume fell at a much slower clip in May from the previous month. This gives a clear indication of recovering consumer spending as lockdowns are lifted.

U.S. payments volume in May fell only to 5% compared with an 18% plunge in April. U.S. consumer confidence also gained in May, indicating upbeat economic activities in the coming days. Small-cap index Russell 2000 ETF IWM has gained 19.8% in the past month (as of Jun 8, 2020) versus 12.2% advance in the S&P 500.

ETF Picks

Against this backdrop, below we highlight a few small-cap growth ETFs that could be solid picks at the current level.

Vanguard SmallCap Growth ETF (VBK - Free Report) – Zacks Rank #2 (Buy); Up 22.2% past month

iShares SP SmallCap 600 Growth ETF (IJT – Zacks Rank #1 (Strong Buy); Up 18.1% past month

Janus Henderson Small Cap Growth Alpha ETF (JSML - Free Report) – Zacks Rank #1; Up 20.9% past month

iShares Morningstar SmallCap Growth ETF – Zacks Rank #1; Up 21.5% past month

Vanguard Russell 2000 Growth ETF (VTWG - Free Report) – Zacks Rank #1; Up 21.6% past month

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