Group 1: Small-Cap Market Momentum - The small-cap space has shown momentum recently, with the iShares Russell 2000 ETF (IWM) gaining nearly 3% over the past week, outperforming the broad market fund (SPY) which gained 1% [1] - Anticipated Fed rate cuts are contributing to this momentum, with futures markets pricing in a 94% chance of a quarter-point cut at the next Fed meeting, up from 85% before the latest inflation data [2] - Small-cap companies, which typically have a higher debt burden at floating rates, will benefit from lower borrowing costs, aiding their expansion and profitability [3] Group 2: Valuation and Investment Opportunities - The Russell 2000 has underperformed the S&P 500 year-to-date, with a gain of just 1.5% compared to 9.6%, potentially providing an advantageous entry point for investors [4] - Small-caps are currently trading at a discount compared to large-caps, attracting institutional investors who are rotating out of crowded mega-cap trades into undervalued small-cap segments [5] Group 3: Business Sentiment and Economic Indicators - Optimism among small business owners increased in July, with the small business optimism index rising to 100.3, the highest since February and above the 52-year average of 98, indicating a stabilizing business environment [6] - Trends in reshoring and onshoring favor small-cap firms, as companies bring supply chains back to the U.S. amid global supply chain vulnerabilities [7] Group 4: M&A Activity and Market Dynamics - Dealmaking is increasing in sectors like healthcare, biotech, and tech services, with large-cap companies targeting small and mid-sized firms for growth, which historically favors small companies [8] - The broadening market breadth, where gains are spreading more evenly across the market, signals healthier market dynamics and could catalyze small-cap outperformance [10] Group 5: Investment Vehicles - Several ETFs in the small-cap space have a strong Zacks ETF Rank 1 (Strong Buy) or 2 (Buy), indicating potential outperformance in the coming weeks, including iShares Core S&P Small-Cap ETF (IJR) and Vanguard Small-Cap ETF (VB) [11]
Are Small-Cap ETFs Finally Ready to Shine?
ZACKSยท2025-08-19 16:01