Small cap stocks are beginning to pop. Listed below are the three best ETFs to reap the benefits of their resurgence.
Small cap stocks and ETFs have had a little bit of a resurgence in recent weeks after lagging large caps the past couple of years.
Analysts had expected higher results from small caps in the beginning of the 12 months, after a robust fourth quarter of 2023. Many predicted the market to broaden beyond large caps this 12 months and for small caps to outperform in 2024. But through the primary half of the 12 months, that didn’t occur, as large caps continued to dominate.
12 months-to-date, the Russell 2000 is up 9.5%, while the S&P 500 is up 16.6%. But recently, the Russell 2000 has outperformed, rising 6% last week and one other 3.4% this week. The resurgence might be a blip, or simply delayed from what many analysts consider would occur this 12 months.
As well as, small caps have historically performed well in presidential election years. A recent study by Lincoln Financial said small caps have beaten large caps in 7 of the last 11 presidential election years and have also outpaced large caps within the 12 months after the election. So, this might be a chance for investors to reap the benefits of the trend.
A superb method to tap into small caps is thru ETFs. Listed below are 3 top small cap ETFs to contemplate.
1. Invesco S&P SmallCap Momentum ETF
The Invesco S&P SmallCap Momentum ETF (NYSEARCA:XSMO) has been among the finest performing small cap ETFs over the past 12 months. It has a one-year return of 36% as of July 16 and is up 17% YTD.
This can be a more concentrated small cap growth ETF, tracking the S&P SmallCap 600 Momentum Index. The ETF includes 120 stocks inside the S&P SmallCap 600 which have the best momentum scores, or upward price movements relative to other stocks inside the index. Which means the fund includes the stocks with probably the most upside, at any given time. There may be a variety of growth momentum straight away, so it should outperform.
The highest three holdings are Abercrombie & Fitch (NYSE:ANF), Insight Enterprises (NASDAQ:NSIT), and Fabrinet (NYSE:FN).
2. Invesco S&P SmallCap Value with Momentum ETF
Yes, that is one other Invesco ETF, however the asset manager boasts a wonderful roster of small cap ETFs. The Invesco S&P SmallCap Value with Momentum ETF (NYSEARCA:XSVM) has been among the finest long-term small cap performers, with a five-year annualized return of 16.2%, which is the very best in its class. Further, it has returned 6.5% YTD and has a one-year return of 21.9% as of July 16.
This ETF tracks the S&P 600 High Momentum Value Index, which consists of 120 stocks within the S&P SmallCap 600 Index with the best value scores and momentum scores. So, it includes stocks which have low valuations, yet even have upward price momentum. Stocks are weighted within the portfolio by their value scores.
Small caps stocks are very undervalued on the whole, after a few years of lagging returns. This fund is attractive since it includes those value stocks which are on the move.
The three largest holdings within the ETF are Kelly Services (NASDAQ:KELYA), Kohlʻs (NYSE:KSS), and Par Pacific Holdings (NYSE:PARR).
3. Principal U.S. Small Cap ETF
The Principal U.S. Small Cap ETF (NASDAQ:PSC) has also been among the finest long-term ETFs in its class with a five-year annualized return of 12.1% as of July 16. Further, it has returned 22.6% over the past 12 months and is up 14.3% YTD.
This ETF is actively managed and has beaten the Russell 2000 benchmark over the one, three, and five-year periods. The managers — Christopher Ibach and Aaron Siebel — search out top quality small caps which are each good values and have strong momentum. Additionally they avoid fundamentally distressed firms.
With this ETF, you get the good thing about skilled management to make the obligatory changes because the markets shift. The portfolio managers have 49 years of portfolio management experience between them.
The portfolio includes 500 stocks, so it’s broadly diversified inside the small cap universe. The highest three holdings are Lantheus Holdings (NASDAQ:LNTH), Jackson Financial (NYSE:JXN), and Super Micro Computer (NASDAQ:SMCI).
These three small caps ETFs all complement one another well, bringing growth, value, and a more broadly diversified strategy that’s actively managed. All could be good additions to a portfolio, particularly now as small caps appear to be on the move.