3 Reasons Why Small-Cap Value ETFs Could Emerge Winners
In the first half of 2023, U.S. small-cap stocks showed decent trends but lagged the S&P 500 (up about 16%) and Nasdaq Composite (up about 31.7%). The small-cap Russell 2000, an index tracking U.S. small-cap stocks, saw modest gains of around 7.2% during that period. The S&P 600 small-cap ETF SLY offered an even muted performance of 4% in 1H.
However, the pint-sized stocks should gain momentum in 2H due to a better-than-expected U.S. economic recovery and a still-resilient consumer base. Since small-cap stocks are closely tied to the domestic economy, an uptick in economic outlook bodes well for small caps. These stocks are not heavily export-centric and, hence, do not get battered if the greenback rises.
Below, we highlight a few reasons why small-cap stocks should soar higher in the coming days.
Decent U.S. GDP Growth
The U.S. economy expanded at an annualized rate of 2.1% in the second quarter of 2023 compared to the preliminary figure of 2.4% and the first quarter’s expansion of 2.0%. Downward revisions to both private inventory investment and nonresidential fixed investment were partially made up by an upward revision to state and local government spending.
Greenback to Remain Strong Ahead?
Solid economic data points raise the odds of rate hikes in the next Fed meeting. Additionally, inflation remains sticky, which will make it difficult for the Fed to cut rates anytime soon. This, in turn, should keep the greenback strong.
The U.S. dollar index rallied to the highest level since November on Sep 26, 2023 as the U.S. 10-Year Treasury Note yield also hit the highest level since 2007. With small-cap companies being more inclined to the domestic economy and having less foreign exposure, a stronger U.S. dollar is beneficial for the segment.
Consumer Confidence Wanes but Spending Still High
Wells Fargo senior economist Tim Quinlan noted that consumer confidence and consumer spending have not consistently matched up in the post-pandemic era in the United States, partly due to stimulus-driven spending, as quoted on Yahoo Finance.
In July, nominal U.S. retail sales growth accelerated to 0.7% sequentially from 0.3% in June. Private consumption (which makes up about 70% of U.S. GDP) continues to be bolstered by low unemployment and robust wage growth. The year-on-year increase in average hourly earnings has grown faster than consumer price inflation for the past three months, per eiu.com.
However, this trend may change as credit card delinquencies increase. With credit becoming more expensive, we might see an actual drop in spending.
Time for Value ETFs?
Given this favorable yet edgy investing backdrop, investors can bet on small-cap value ETFs. After all, value investing requires buying securities that appear underpriced. Also, value stocks perform better in a rising rate environment.
ETFs to Buy
WisdomTree U.S. SmallCap Dividend ETF (DES) – Zacks Rank #1 (Strong Buy)
Vanguard Russell 2000 Value ETF (VTWV) – Zacks Rank #1
SPDR S&P 600 Small Cap Value ETF (SLYV) – Zacks Rank #1
Invesco S&P SmallCap Value With Momentum ETF (XSVM) – Zacks Rank #2 (Buy)
iShares Russell 2000 Value ETF IWN– Zacks Rank #1
First Trust Small Cap Value AlphaDEX ETF FYT – Zacks Rank #2
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Get it free >>WisdomTree U.S. SmallCap Dividend ETF (DES): ETF Research Reports
First Trust Small Cap Value AlphaDEX ETF (FYT): ETF Research Reports
iShares Russell 2000 Value ETF (IWN): ETF Research Reports
Vanguard Russell 2000 Value ETF (VTWV): ETF Research Reports
SPDR S&P 600 Small Cap Value ETF (SLYV): ETF Research Reports
Invesco S&P SmallCap Value with Momentum ETF (XSVM): ETF Research Reports
