In This Article:
The Russell 2000 Index, which tracks U.S. small-cap companies, rose 4.1%, its biggest weekly gain since November. The increase came amid a broad market rally, driven by easing trade tensions and a possible Fed rate cut.
In order to tap the current momentum, investors should consider small-cap ETFs for diversified exposure across several sectors. We have highlighted five funds that have a Zacks ETF Rank #1 (Strong Buy) or #2 (Buy) each, suggesting their outperformance in the coming weeks. These are iShares Core S&P Small-Cap ETF IJR, iShares Russell 2000 ETF IWM, Vanguard Small-Cap ETF VB, Schwab U.S. Small-Cap ETF SCHA and Vanguard Russell 2000 ETF VTWO.
What’s Driving the Rally in Small-Caps?
Though small-caps rallied last week, they currently lag behind their large-cap counterparts. But soon, they will be catching up if trade and the political environment continue to improve.
According to several reports, China might suspend its 125% tariff on some U.S. goods. This boosted market sentiment. The potential tariff cuts would target key sectors, including medical equipment and industrial chemicals such as ethane, a crucial material for plastic production. China is also weighing the removal of tariffs on aircraft leasing payments, a major expense for domestic airlines (read: Tariff Relief Talks Lift Tech ETFs, Stocks: What's Ahead?).
In an interview with Time magazine on Friday, Trump said he expects many trade deals over the next three to four weeks. The possibility of reduced tariffs suggests a more favorable environment for domestic businesses, particularly small-cap companies that are more sensitive to trade dynamics.
While Powell has emphasized a wait-and-see approach toward further interest rate cuts in response to President Trump’s tariffs, a few other Fed officials signaled openness to potential reductions. Federal Reserve Bank of Cleveland President Beth Hammack, in a CNBC interview, said a cut as early as June could be possible. As the pint-sized companies have a higher debt burden (mostly at floating rates), lower rates lead to reduced borrowing costs, helping small businesses expand their operations easily and resulting in increased profitability. This, in turn, stimulates economic growth. As small-cap companies are more domestically tied, they are poised to outperform when the economy improves.
ETFs to Ride the Rally
iShares Core S&P Small-Cap ETF (IJR)
iShares Core S&P Small-Cap ETF is the largest and most popular ETF in the small-cap space, with an AUM of $72.5 billion and an average daily volume of 7.5 million shares. It follows the S&P SmallCap 600 Index and holds 637 stocks in its basket, with none accounting for more than 0.6% of the assets. Financials, industrials, consumer discretionary and information technology are the top four sectors with double-digit exposure each. The product charges investors 6 bps in annual fees.
iShares Russell 2000 ETF (IWM)
iShares Russell 2000 ETF tracks the Russell 2000 Index and holds 1,941 well-diversified stocks in its basket. IWM has key holdings in financials, industrials, healthcare, and information technology. iShares Russell 2000 ETF has AUM of $57.9 billion and trades in an average daily volume of 46 million shares. It charges 19 bps in annual fees (read: Will Tariffs Really Boost Reshoring? ETF Areas in Focus).
Vanguard Small-Cap ETF (VB)
Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,357 stocks, with none holding more than 0.5% of the assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five. Vanguard Small-Cap ETF has AUM of $56 billion and trades in a solid average daily volume of about 1.6 million shares. It charges 5 bps in fees per year from investors.
Schwab U.S. Small-Cap ETF (SCHA)
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,719 stocks in its basket. Each security accounts for less than 0.5% of the assets. SCHA is widely spread across sectors, with financials, industrials, health care, information technology and consumer discretionary having double-digit exposure each. Schwab U.S. Small-Cap ETF has amassed $15 billion in its asset base and sees a solid volume of around 5 million shares a day. It has an expense ratio of 0.04%.
Vanguard Russell 2000 ETF (VTWO)
Vanguard Russell 2000 ETF tracks the Russell 2000 Index, holding 1,969 stocks in its basket, with none making up for more than 0.7% of the assets. It is widely spread across various sectors, with financials, industrials, healthcare, consumer discretionary, and information technology being the top five. Vanguard Russell 2000 ETF has accumulated $10.7 billion in its asset base and trades in an average daily volume of 3 million shares. The product charges 7 bps in annual fees.