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Small-Cap ETFs to Play the Recovery in US Economy

Wall Street has been cheering the recovering U.S. economy amid concerns surrounding rising inflation levels and possibilities of a Fed rate hike. Notably, the S&P 500 and Nasdaq Composite have gained 0.9% and 3.8%, respectively, in June.

Markedly, the small-cap centric index, namely the Russell 2000, rose 1.5% in June till now. This upside is being largely led by small-cap companies that are closely tied to the U.S. economy and are therefore well-positioned to outshine when the economy improves.

Meanwhile, investors are worried that increasing inflation may hurt corporate margins and profits. They also fear that this persistent escalation in inflation may put pressure on the Federal Reserve to tighten monetary policy, according to a CNBC article.  

Though the Fed has signaled two rate hikes by the end of 2023 amid higher inflation, Fed Chairman Jerome Powell has however remained bullish on the economic recovery achieved so far from the pandemic-led slump, according to a CNBC article. He also maintained that high inflation levels were temporary and will return to 2% over the long term, per the same article.

The central bank raised GDP growth from 6.5% to 7% for this year, the fastest calendar-year expansion since 1984. It also expects inflation to run hot this year to 3.4%, outpacing the goal of 2%, before receding to 2.1% in 2022.

Meanwhile, the decline in the number of coronavirus cases has increased optimism among market participants toward faster recovering and reopening of the U.S. economy.

Markedly, accelerated vaccine distribution, strong fiscal stimulus support and the reopening of non-essential businesses are expected to expedite the economic recovery pace.

Furthermore, there are certain new economic data releases, which are pointing toward economic recovery. Notably, the recently-released robust job and manufacturing data majorly buoyed market participants' optimism. The Department of Labor reported that the U.S. economy added 559,000 jobs in May compared with the upwardly revised 278,000 payrolls included in April, as mentioned in a CNBC article.

Also, the latest ISM Manufacturing PMI data for the United States is painting a rosy picture for the sector. The ISM Manufacturing PMI read 61.2 in May against 60.7 in April. May’s growth was higher than analysts’ expectations of 60.7. Moreover, manufacturing activity rose for the 12th straight month.

The latest update on U.S. manufacturing output also looks impressive. Per the Fed’s recently-released data, total industrial production rose 0.8% in May. Going on, there was a 0.9%, 1.2% and 0.2% rise, respectively, in manufacturing output, mining and utilities production.                       .

Red-Hot Small-Cap ETFs to Consider

For investors looking to capitalize on this opportunity, the following small-cap ETFs could be strong pure plays:

Vanguard Small-Cap Growth ETF VBK

This fund follows the CRSP US Small Cap Growth Index. The product managed assets worth $15.82 billion, and charges 7 basis points (bps) in annual fees and expenses (read: Fed Likely to Remain Dovish: ETFs to Buy).

iShares Russell 2000 Growth ETF IWO

This fund tracks the Russell 2000 Growth Index and offers exposure to small-cap companies that have earnings growth expectations above average rate relative to the market. The product managed assets worth $12.04 billion and charges 24 bps in annual fees and expenses (read: ETFs at Risks If Tax Law Changes in U.S.).

iShares S&P Small-Cap 600 Growth ETF IJT

This product tracks the S&P SmallCap 600 Growth Index. It managed assets worth $6.29 billion and charges 18 bps in annual fees and expenses.

SPDR S&P 600 SmallCap Growth ETF SLYG

This ETF follows The S&P SmallCap 600 Growth Index, which comprises stocks that exhibit the strongest growth characteristics based on sales growth, earnings change to price and momentum. The product managed assets worth $2.26 billion and charges 15 bps in annual fees and expenses.

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iShares Russell 2000 Growth ETF (IWO): ETF Research Reports
 
iShares S&P SmallCap 600 Growth ETF (IJT): ETF Research Reports
 
Vanguard SmallCap Growth ETF (VBK): ETF Research Reports
 
SPDR S&P 600 Small Cap Growth ETF (SLYG): ETF Research Reports
 
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Zacks Investment Research
 
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