Top 3 Small Cap ETFs
Small cap stocks are starting to surge. Here are three of the best ETFs to capitalize on their resurgence.
Small cap stocks and ETFs have lagged their large cap counterparts over the past few years, but have shown some recovery in recent weeks.
Analysts had expected better performance from small caps early this year after strong performance in Q4 2023. Many predicted that the market would expand beyond large caps this year and that small caps would outperform in 2024. However, that did not happen as large caps continued to dominate in the first half of the year.
The Russell 2000 is up 9.5% year to date, while the S&P 500 is up 16.6%. However, the Russell 2000 has been doing better recently, up 6% last week and up 3.4% this week. This rebound could be temporary, or it could be delayed compared to what many analysts believe will happen this year.
Additionally, small caps have historically performed well in presidential election years. A recent study by Lincoln Financial found that small caps outperformed large caps in election years in seven of the last 11 years, and also outperformed large caps in the year following the election. So this could be an opportunity for investors to capitalize on this trend.
A great way to invest in small cap stocks is through ETFs. Here are the top three small cap ETFs to consider.
1. Invesco S&P SmallCap Momentum ETF
that much Invesco S&P SmallCap Momentum ETF (NYSEARCA:XSMO) has been one of the best performing small-cap ETFs over the past year, with a 1-year return of 36% and a YTD gain of 17% as of July 16.
This is a more concentrated small-cap growth ETF that tracks the S&P SmallCap 600 Momentum Index. This ETF includes 120 stocks within the S&P SmallCap 600. Stocks with the highest momentum score or price movement relative to other stocks in the index. In other words, this fund includes stocks that have the highest potential to rise at a given time. It will outperform now that it has a lot of growth momentum.
His top 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, this is another Invesco ETF, but the asset manager boasts a great collection of small-cap ETFs. Invesco S&P SmallCap Value with Momentum ETF (NYSEARCA:XSVM) is one of the best performing long-term small cap stocks, with a 5-year annualized return of 16.2%, a best-in-class performance. It also has a YTD return of 6.5% and a 1-year return of 21.9% as of July 16.
This ETF tracks the S&P 600 High Momentum Value Index, which consists of the 120 stocks with the highest value and momentum scores in the S&P SmallCap 600 Index. This includes stocks with lower valuations but rising price momentum. Stocks are weighted in the portfolio according to their value scores.
Small cap stocks are generally very undervalued after years of underperformance. This fund is attractive because it includes moving value stocks.
The ETF’s three largest holdings are Kelly Services (NASDAQ:KELYA), Kohl’s (NYSE:KSS), and Par Pacific Holdings (NYSE:PARR).
3. Major US small-cap ETFs
that much Major US Small Cap ETFs (NASDAQ:PSC) is also one of the best long-term ETFs in its class, with a 5-year annualized return of 12.1% as of July 16. It has also returned 22.6% over the past year and is up 14.3% YTD.
This ETF is actively managed and has outperformed the Russell 2000 benchmark over 1, 3, and 5 year periods. The managers (Christopher Ibach and Aaron Siebel) look for high quality small cap stocks with both good value and strong momentum. They also avoid companies that are fundamentally struggling.
With this ETF, you get the benefit of professional management to make the necessary changes as the market changes. The portfolio manager has 49 years of portfolio management experience.
The portfolio contains 500 stocks, so it is broadly diversified within the small-cap universe. The top three holdings are Lantheus Holdings (NASDAQ:LNTH), Jackson Financial (NYSE:JXN), and Super Micro Computer (NASDAQ:SMCI).
These three small-cap ETFs all complement each other well, offering growth, value, and more broadly diversified actively managed strategies. All would be good additions to a portfolio, especially now that small-caps seem to be on the move.
