6 Reasons Why You Should Tap Small-Cap ETFs Now

The small-cap space has lately fared better than the S&P 500. The S&P 500 has declined 1.2% past week and down 0.4% past month (as of Jun 3, 2022) while the SPDR S&P 600 Small Cap ETF SLY has dipped 0.4% past week and is up 0.8% past month.

Upbeat Jobs Data

And why not? Some U.S. economic data points have come in upbeat of late.  The U.S. economy added 390,000 jobs in May 2022 (lower than 436,000 jobs in April), the least since April last year but above market forecasts of 325,000. The latest reading left the economy 0.5% below its pre-pandemic level, in a telltale sign of a solid labor market.  

Upbeat Manufacturing Data

Plus, on Jun 1, 2022, the Institute of Supply Management (ISM) reported that its manufacturing index for May rose to 56.1% from 55.4% in April, beating the consensus estimate of 54.5%. Faster increases were seen for new orders (55.1 versus 53.5), production (54.2 versus 53.6) and inventories (55.9 versus 51.6). Also, price pressures relieved for the second month (82.2 versus 84.6) while employment shrank (49.6 versus 50.9).

Decent Retail Sales Data

Moreover, retail sales in the United States increased 0.9% sequentially in April 2022, after an upwardly revised 1.4% surge in March and matching market forecasts. The reading showed that American consumers continued to spend despite red-hot inflation. Such data points have washed off the U.S. recessionary fears as of now, which is a great news of small-cap stocks (read: ETFs & Stocks to Win on Uptick in April Retail Sales).

Strong Greenback

Small-cap stocks have more domestic exposure than their bigger peers and hence are less unscathed in a phase of greenback rally. WisdomTree Bloomberg U.S. Dollar Bullish ETF USDU was up 0.2% last week and also has gained 2.6% in the past three months. This is yet another reason why small-cap stocks and ETFs are faring better than the large-cap stocks.  

U.S. GDP Growth Data Revised Upwardly

The nonpartisan Congressional Budget Office estimates that real gross domestic product, or GDP, will expand 3.1% in 2022, as quoted on CNBC. Scorching high inflation has hit the top and will cool each month to around 2% by some point in 2024, according to a government forecast in late May, the CNBC article pointed out. The CBO office has updated its estimates for GDP growth in 2023 and 2024 upwardly to 2.2% and 1.5%, respectively.

Decent Earnings Picture

The earnings picture remains decent. Per the Earnings Trends issued on Jun 1, 2022, earnings growth for Q1 of 2022 for the S&P 600 Index is expected to be 23.4% on 21.9% of revenue growth. The earnings growth for Q2 of 2022 will likely be 8.8% over 12.4% of revenue growth.

Against this backdrop, below we highlight a few small-cap ETFs that are enjoying a winning momentum.

ETFs in Focus

WisdomTree U.S. SmallCap Quality Dividend Growth ETF DGRS – Up 2.6% Past Month

IQ Chaikin U.S. Small Cap ETF CSML – Up 2.1%

OShares U.S. Small Cap Quality Dividend ETF OUSM – Up 1.9%

Invesco S&P SmallCap Low Volatility ETF XSLV – Up 1.8%

SPDR SSGA US Small Cap Low Volatility Index ETF SMLV – Up 1.7%

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.