Focus On Small-Cap ETFs Amid Trade War Fears

Currently, the Wall Street is stuck in a vicious circle of bull and bear tug-of-war due to growing concerns over the trade war arising from Trump’s proposed tariffs plan. Threats of inflation and faster-than-expected rates hike are also stimulating the bears though the current macro trends remain bullish.

In this backdrop, small-cap stocks are easily outpacing the large and mid-cap counterparts. In fact, from a year-to-date look, small caps, as represented by the largest and popular ETF IWM, have added 6.8% over the past month, compared to gains of about 4.3% for large-cap ETF (AX:SPY) and 5.7% for mid-cap ETF IJH.

The surge in small caps are expected to continue at least in the near term assuming risk-off trade and continued focus on true domestic exposure. This is because small caps are considered safe and better plays if any political issue creeps into the picture. As such, these pint-sized stocks could better insulate investors against Trump’s trade-protectionism policy (read: 6 ETFs to Tap as Trump's Tariff Plans Spook Markets).

Additionally, the strengthening economy is providing a boost to small-cap stocks that are closely tied to the U.S. economy and do not have much exposure to the international market. Increased consumer spending, rising consumer confidence, 17-year low unemployment, and a pickup in average hourly earnings are bolstering confidence in the economy.

Further, solid corporate earnings and the euphoria surrounding tax reform have been the biggest catalysts to the stock market this year. This is because the new tax law will perk up the economy and save billions for corporations, leading to reflation trade and an earnings boost. This would provide an additional lift to small-cap stocks (see: all the Small Cap ETFs here).

Given this, there have been winners in many corners of the small-cap space. Below we have presented five ETFs that have been leading the way over the past month and are likely to continue their strong performance amid the political turmoil. These funds have a Zacks ETF Rank #3 (Hold):

PowerShares S&P SmallCap Information Technology Portfolio PSCT)

This fund offers exposure to the small-cap segment of the technology sector by tracking the S&P SmallCap 600 Capped Information Technology Index. Holding 93 securities in its basket, the product is well spread across securities with each holding less than 3.5% share. From an industry look, about one-fourth of the portfolio is allocated to electronic equipment, followed by semiconductors (23.5%), IT services (14.3%), software (12.4%), and communication equipment (12.1%). The product has managed $436.7 million in its asset base and trades in moderate average daily volume of about 39,000 shares. It charges 29 bps in fees per year from investors and has surged 9.4% in a month (read: Tech ETFs & Stocks Surviving the Market Rout in February).

iShares Russell 2000 Growth ETF IWO

This is one of the popular and liquid ETFs in the small-cap space with AUM of $9 billion and average trading volume of 588,000 shares a day. The fund provides exposure to a broad basket of 1,162 stocks by tracking the Russell 2000 Growth Index. It is well spread out across components as none of these holds more than 1.29% of assets. Sector wise, information technology and health care take the top two spots at 25% each, leaving a decent allocation for the others. The fund charges 24 bps in annual fees from investors and has risen 9.4% in a month.

Vanguard Russell 2000 Growth Index ETF VTWG

This fund follows the Russell 2000 Growth Index, providing diversified exposure to a broad basket of 1,203 stocks as none of these holds more than 1.1% of assets. About one-fourth of the portfolio is allotted to health care while technology, producer durables, consumer discretionary and financial services also take double-digit exposure each. The product has amassed $243.7 million in its asset base while volume is light at 9,000 shares a day on average. It charges 20 bps in annual fees and has gained 9.2% in a month (read: Best Small-Cap ETFs of 2017 with Huge Upside in 2018).

iShares Morningstar Small-Cap Growth ETF JKK

This ETF follows the Morningstar Small Growth Index and holds 252 securities in its basket with none accounting for more than 2.5% of assets. Information technology accounts for the largest share of 28.9% 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 3,000 shares a day. It has amassed $149.3 million in its asset base and has gained 8.3% over the past month.

iShares S&P Small-Cap 600 Growth ETF IJT

This fund follows the S&P SmallCap 600 Growth Index and holds a well-diversified portfolio of 337 stocks, with each security making up for no more than 3.85% of assets. Here also, healthcare is the top sector with 23.3% allocation while industrials, information technology, financials, and consumer discretionary round off the next spots. IJT has AUM of $5.1 billion and average trading volume of 116,000 shares. Expense ratio comes in at 0.25%. The fund is up 8.4% in a month (read: Amazing ETF Strategies for Skyrocketing Markets).

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SPDR-SP 500 TR (SPY (NYSE:SPY)): ETF Research Reports

ISHARS-R 2000 (IWM): ETF Research Reports

ISHARS-RS 2K GR (IWO): ETF Research Reports

ISHARS-SP SC GR (IJT): ETF Research Reports

PWRSH-SP SC IT (PSCT): ETF Research Reports

ISHARS-SP MID (IJH): ETF Research Reports

VANGD-RUS 2000G (VTWG): ETF Research Reports

ISHARS-MO SC GR (JKK): ETF Research Reports

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Zacks Investment Research