Add These Small-Cap ETFs to Your Portfolio in Q2

Sweta Jaiswal, FRM
·4-min read

Wall Street posted a decent first quarter of 2021. Notably, the Dow Jones Industrial Average and the S&P 500 surged 7.8% and 5.8%, respectively, in the period, witnessing their fourth straight positive quarter (per a CNBC article). Moreover, the mid-cap specific S&P 400 climbed 13.1% in the same period.

Markedly, the two small-cap centric indexes, namely the Russell 2000 and the S&P 600 rose 12.4% and 17.9%, respectively. This upside is being largely led by small-cap companies that are closely tied to the U.S. economy and are therefore well-positioned to outshine when the economy improves.

Factors That Can Drive the Small-Cap ETF Rally in Q2

Importantly, the second quarter is expected to benefit from the impressive progress made in the previous quarter. Notably, the passing of the $1.9-trillion coronavirus relief package, Fed’s decision to maintain rates at near-zero level until 2023, accelerated coronavirus vaccine distributions and the reopening of global economies help strengthen the optimism for economic recovery.

Notably, the central bank raised its economic growth outlook considering the vaccine and stimulus optimism and it also expects higher inflation this year. Furthermore, there are several new economic data releases, which are pointing toward economic recovery.

The central bank lifted its forecast for GDP growth to 6.5% in 2021 from 4.2% projected in December 2020. It has also raised the economic growth forecast from 3.2% to 3.3% for 2022. Moving on, growth is likely to cool down in 2023 to 2.2%. The Fed predicted the longer-run growth measure at 2.3%.

An unprecedented fiscal stimulus is also painting a rosy picture ahead for the small-cap companies. President Joe Biden finally signed the $1.9-trillion coronavirus relief package, also known as the American Rescue Plan Act of 2021, into law. The stimulus includes $15 billion as grants to small businesses along with $35 billion of low-interest loans. The $284 billion worth of loans from the Small Business Paycheck Protection Program will also continue.

An accelerated coronavirus vaccine rollout, introduction of another round of fiscal support and the reopening of U.S. economy may lead to faster U.S. economic improvement from the pandemic-triggered slowdown.

Encouragingly, the Biden regime now aims at distributing 200 million coronavirus vaccines within its first 100 days since joining office, per a CNBC article. The speeding up of the vaccination drive increased chances of a speedier-than-expected resumption of the U.S. economic activities which can benefit the small-cap companies.

Red-Hot Small-Cap ETFs to Consider

For investors looking for capitalizing on this opportunity, the following small-cap ETFs could be strong pure plays:

Vanguard Small-Cap Growth ETF VBK

This fund follows the CRSP US Small Cap Growth Index. The product managed assets worth $15.53 billion, and charges 7 basis points (bps) in annual fees and expenses. The fund currently sports a Zacks ETF Rank #1 (Strong Buy) with a Medium-risk outlook (read: ETFs at Risks If Tax Law Changes in U.S.).

iShares Russell 2000 Growth ETF IWO

This fund tracks the Russell 2000 Growth Index and offers exposure to small-cap companies that have earnings growth expectations above average rate relative to the market. The product managed assets worth $12.42 billion and charges 24 bps in annual fees and expenses. The fund presently flaunts a Zacks ETF Rank of 1 with a High-risk outlook (read: 5 Best ETF Investing Ideas for 2021).

iShares S&P Small-Cap 600 Growth ETF IJT

This product tracks the S&P SmallCap 600 Growth Index. It managed assets worth $6.34 billion and charges 18 bps in annual fees and expenses. The fund carries a Zacks ETF Rank #1 with a Medium-risk outlook

SPDR S&P 600 SmallCap Growth ETF SLYG

This ETF follows The S&P SmallCap 600 Growth Index, which comprises stocks that exhibit the strongest growth characteristics based on sales growth, earnings change to price and momentum. The product managed assets worth $2.27 billion and charges 15 bps in annual fees and expenses. The fund carries a Zacks ETF Rank #1 with a Medium-risk outlook.

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iShares Russell 2000 Growth ETF (IWO): ETF Research Reports
 
iShares S&P SmallCap 600 Growth ETF (IJT): ETF Research Reports
 
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