After a horrendous journey in the past few weeks, Wall Street bulls look likely to be back albeit cautiously, with the key U.S. indexes gaining. Not only have the three large-cap indexes — the S&P 500, the Nasdaq and the Dow Jones — been marching upward but also small caps — devastated by coronavirus selloff — are exhibiting momentum (read: Optimism Back in Wall Street? ETFs Areas to Win the Most).
Coronavirus-led lockdowns and shutting down of businesses are causing a severe cash crunch among companies. Small caps with a weak balance sheet have faced the crisis even more. As a result, the small-cap gauge, the Russell 2000 Index, added only 2.9% past month against 6.4% advancement in the S&P 500.
However, more compelling valuation, relative underperformance compared to the large caps, a super-dovish Fed and the U.S. government’s gigantic aid to help small-and-mid-sized companies amid coronavirus have been driving the small-cap cohort lately. In the past five days, the Russell 2000 has gained 3.1% versus the 0.06% dip in the S&P 500.
Why It Could be Time for Small-Cap ETFs
Since small-cap stocks are more closely tied to the domestic economy, they have lower exposure to global markets and should thus be less ruffled by the global coronavirus threat. Slowdown in new virus case additions in the United States should benefit the segment. Moreover, President Trump revealed new guidelines on Apr 16 to help states ease their social distancing controls.
Small-caps should also gain ahead on massive monetary and fiscal stimulus. In early April, the Fed announced an investment of up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as to fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities. The Fed’s Main Street Lending program can be considered as a plus for pint-sized stocks (read: Fed Goes the Extra Mile: 6 ETF Areas to Win).
The U.S. government’s virus relief bill should lend support to the small-cap stocks. There was already a $349 billion forgivable loan program in place.The loans at issue were being made through the Paycheck Protection Program, which offers up to $10 million in forgivable loans to businesses with 500 or fewer employees.
Plus, the governmentrecently approved the extension of the Paycheck Protection Program, which is called Phase 3.5. The program increases the PPP by an additional $321 billion. Plus, it has extra funding for disaster relief, hospitals and testing.
Investors should note that the greenback has gained this year. Invesco DB US Dollar Index Bullish Fund UUP is up 4.3% year to date and added 0.8% in the past five days despite massive policy easing. The rising dollar environment lowers the gains of large caps with substantial foreign exposure and favor small-cap companies (read: U.S. Dollar Climbs: ETFs to Gain/Lose).
ETF Picks
Against this backdrop, we highlight a few smaller-cap ETFs that carry a favorable Zacks Rank and have been exhibiting solid pricing momentum (see all small-cap ETFs here).
First Trust Small Cap Core AlphaDEX Fund FYX — Zacks Rank #3 (Hold)
One-Month Return: Up 18.4%
Two-Day Return: Up 3.0%
iShares Edge MSCI Multifactor USA Small-Cap ETF SMLF — Zacks Rank #2 (Buy)
One-Month Return: Up 19.3%
Two-Day Return: Up 2.72%
Invesco PureBeta MSCI USA Small Cap ETF PBSM — Zacks Rank #2
One-Month Return: Up 22.8%
Two-Day Return: Up 2.36%
Vanguard Small-Cap Index Fund ETF Shares VB — Zacks Rank #1 (Strong Buy)
One-Month Return: Up 23.5%
Two-Day Return: Up 2.34%
Vanguard Russell 2000 Index Fund ETF Shares VTWO — Zacks Rank #2
One-Month Return: Up 19.9%
Two-Day Return: Up 2.2%
Schwab U.S. Small-Cap ETF SCHA — Zacks Rank #1
One-Month Return: Up 21.2%
Two-Day Return: Up 2.17%
Goldman Sachs (NYSE:GS) ActiveBeta U.S. Small Cap Equity ETF GSSC — Zacks Rank #1
One-Month Return: Up 18.1%
Two-Day Return: Up 2.04%
SPDR S&P 600 Small Cap (NYSE:SLY) ETF SLY — Zacks Rank #2
One-Month Return: Up 17.2%
Two-Day Return: Up 1.9%
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Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
First Trust Small Cap Core AlphaDEX ETF (FYX): ETF Research Reports
Vanguard Small-Cap ETF (VB): ETF Research Reports
SPDR S&P 600 Small Cap ETF (SLY): ETF Research Reports
iShares Edge MSCI Multifactor USA Small-Cap ETF (SMLF): ETF Research Reports
Schwab U.S. Small-Cap ETF (SCHA): ETF Research Reports
Vanguard Russell 2000 ETF (VTWO): ETF Research Reports
Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC): ETF Research Reports
Invesco PureBeta MSCI USA Small Cap ETF (PBSM): ETF Research Reports
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Zacks Investment Research
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