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Are Small-Cap Value ETFs Good Picks Now?

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Small-cap U.S. stocks suffered a lot this year due to the coronavirus-led lockdown. The crisis has left small-cap companies with a severe cash crunch. However, the Fed’s Main Street Lending Program and U.S. government’s aid have propelled the space in recent weeks.

Small-cap ETF iShares Russell 2000 ETF (IWM - Free Report) added 15.4% past month (as of Jun 16, 2020) versus 7.1% gains in the S&P 500. Though the small-cap segment is pretty vulnerable even after this rally, below we highlight a few reasons that should position small-cap value ETFs for a smooth run in the near term.

Fed Steps Up Support

The Fed would begin purchasing $250 billion in individual corporate bonds as part of its emergency lending program to inject liquidity into the ailing economy. The move represents an expansion of the Fed’s previously announced secondary market corporate credit facility, which had only included purchases of exchange-traded funds. A flood of liquidity in the form of fiscal and economic stimulus sparked a remarkable rally in the stock market since the lows reached in late-March (read: Fed's New Stimulus Regains Confidence: 4 ETF Picks).

Government Funding

Congress has already passed trillions of dollars in rescue funds. Small caps were offered a forgivable loan program. The loans at issue were being made through the Paycheck Protection Program. Moody's Analytics estimates that PPP has saved at least 16 million jobs, or 10% of the U.S. pre-pandemic workforce.

The IRS began sending checks from the middle of April. If this was not enough, the Trump administration is preparing a nearly $1 trillion infrastructure proposal as part of its efforts to bolster the American economy.

Pent-Up Consumer Demand

Retail sales in the United States surged 17.7% sequentially in May, breezing past forecasts of an 8% jump and after a record 14.7% slump in April. It marked the biggest rise on record in retail sales as the coronavirus-led lockdown eased. Most of the sectors that were the biggest laggards in April staged a rebound in May.

The University of Michigan's consumer sentiment for the United States rose to 78.9 in June 2020 from 72.3 in the previous month and above market expectations of 75, a preliminary estimate showed. The measure for current economic conditions increased to 87.8 from 82.3 in May, while the index of consumer expectations rose to 73.1 from 65.9.

Homebuilders’ sentiments too staged the biggest monthly surge ever in June. Builder sentiment jumped a massive 21 points in June to 58. All these data point toward pent-up demand if the virus issue does not take an uncontrollable shape in the near term.

Why Value?

Having said that, we would like to note that in the wake of a host of uncertainties like second wave of coronavirus contagion, the greenback’s latest weakness and U.S. presidential election in 2020, it is better to stick to value stocks at the moment.

First Trust Small Cap Value AlphaDEX Fund (FYT - Free Report) — Up 31% in the past month (as of Jun 17, 2020)

Invesco S&P SmallCap 600 Pure Value ETF (RZV - Free Report) — Up 28.3%

Avantis U.S. Small Cap Value ETF (AVUV - Free Report) – Up 25.43%

WisdomTree U.S. SmallCap ETF (EES - Free Report) – Up 24.0%

iShares Morningstar SmallCap Value ETF – Up 22.8%

PGIM QMA Strategic Alpha SmallCap Value ETF (PQSV - Free Report) – Up 22.7%

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