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Wall Street has been on a roller-coaster ride this year. Yet, the small-cap segment of the broader market has been outperforming, defying extremely volatility. This is especially true as the Russell 2000 is nearing its record levels with just less than 1% away from its peak.
Why Small Caps?
Global sentiments have been deteriorating due to lack of progress in U.S.-China trade talks, downbeat economic data across many parts of the world and Trump's decision to re-impose sanctions on Iran, which has intensified the geopolitical risk. All these weighed on large-cap stocks but benefited the small caps as these are insulated from international headwinds, including trade policy and geopolitical tensions. These are considered safe and better plays if political issue or economic turmoil creeps into the picture.
As the pint-sized stocks are closely tied to the U.S. economy and do not have much exposure to the international market, an encouraging domestic economic trend backs their momentum. The U.S. economy has entered its second-longest expansion phase since 1785, thanks to higher consumer spending, rising consumer confidence, low borrowing cost, growing wages, and solid hiring. In particular, consumers were more confident in April, with consumer confidence index rebounding to an 18-year high, indicating solid economic growth prospects.
Additionally, small-cap stocks are the biggest beneficiaries of the tax cut as these pay higher taxes with a median effective tax rate of 31.9%. In comparison, the larger, multi-national companies on the S&P 500 pay a lower median effective tax rate of 28%, while the tax rate for 30 mega-cap stocks on the Dow Jones Industrial Average is even low at 23.8%.
Further, these stocks get a boost from the strength in greenback and lately due to rising yields.
Given this, we have highlighted five ETFs that hit all-time highs in the last trading session. Any of these could be excellent plays for investors seeking true domestic exposure and have the potential to move even higher as long as international headwinds persist. All these funds have a Zacks ETF Rank #3 (Hold):
Market-Beating Small-Cap ETFs Trading at New Highs: iShares Russell 2000 ETF (IWM)
The ultra-popular iShares Russell 2000 ETF (NYSEARCA: IWM ) provides exposure to a broad basket of 1,978 stocks with each holding no more than 0.54% of the assets by tracking the Russell 2000 Index.
Financials, information technology, healthcare, industrials and consumer discretionary are the top five sectors. The product has amassed nearly $44 billion in its asset base and trades in heavy volume of 23.9 million shares a day on average.
It charges 20 bps in expense ratio. The fund scaled a fresh high of $160.69, having gained 4.7% so far this year.
Market-Beating Small-Cap ETFs Trading at New Highs: Vanguard Russell 2000 ETF (VTWO)
The Vanguard Russell 2000 ETF (NASDAQ: VTWO ) also tracks the Russell 2000 Index, holding 2003 stocks in its basket with none making up for more than 0.6% of the assets.
From a sector look, financial service takes the largest share at 25% while healthcare, technology, consumer discretionary and producer durables also receive double-digit allocation each.
The ETF has accumulated $1.4 billion in its asset base and trades in average daily volume of 84,000 shares. It charges 15 bps in annual fees and surged to a new high of $128.99 with year-to-date gain of 4.8%.
Market-Beating Small-Cap ETFs Trading at New Highs: Vanguard Small-Cap Growth ETF (VBK)
The Vanguard Small-Cap Growth ETF (NYSEARCA: VBK ) targets the growth segment of the small cap space. It tracks the CRSP US Small Cap Growth Index, holding 676 securities in its basket with none accounting for more than 0.8% of assets.
Industrials, technology, financials, health care, and consumer services make up for double-digit allocation each. The product has amassed $7.9 billion in its asset base while it trades in good volume of around 135,000 shares.
VBK charges 7 bps in fees per year and hit a record high of $173.32, representing a gain of about 7% in the year-to-date timeframe.
Market-Beating Small-Cap ETFs Trading at New Highs: iShares S&P Small-Cap 600 Growth ETF (IJT)
The iShares S&P Small-Cap 600 Growth ETF (NASDAQ: IJT ) also offers exposure to small cap growth stocks and follows the S&P SmallCap 600 Growth Index. It holds a well-diversified portfolio of 332 stocks, with each security making up for no more than 1.38% of the assets.
Healthcare and industrials are the top two sectors with 20% allocation each while information technology, consumer discretionary and financials round off the next spots. IJT has AUM of $5.6 billion and average trading volume of 122,000 shares.
Expense ratio comes in at 0.25%. The fund has gained 7% in the year-to-date time frame, hitting a fresh high of $183.57.
Market-Beating Small-Cap ETFs Trading at New Highs: First Trust Small Cap Growth AlphaDEX Fund (FYC)
The First Trust Small Cap Growth AlphaDEX Fund (NASDAQ: FYC ) provides a slightly active choice as it uses the AlphaDEX methodology to select the stock. This approach results in a basket of 262 stocks widely spread across securities, with each holding less than 0.9% share.
From a sector look, health care takes the top spot at 27.4% while information technology, consumer discretionary, industrials, and financials receive double-digit exposure each. The product has $208 million in AUM and charges 70 bps in annual fees.
Volume is paltry with 33,000 shares exchanged a day on average. FYC touched an all-time high of $46.17, and has returned about 7.7% so far this year.
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