Small-cap stocks are quickly making big inroads against the S&P 500 — including some of its winners like Nvidia. And ETFs offer a way to play the shift.
Just look at some of the huge gains inside the iShares Core S&P Small-Cap ETF, the largest small-cap ETF with $80.7 billion in assets. Eight of its holdings, including Sunrun, Pitney Bowes and 3D Systems, are up 30% or more just this month. And Nvidia during this time? It looks like a loser, down 4%.
And it's not just a lucky handful of small stocks. The ETF is up 9.4% just this month. That's a remarkable gain in a short period of time if you consider the SPDR S&P 500 ETF gained just 2.5% in that time.
"This surge brought the small cap index to its highest level since January 2022, signaling a potential breakout for a sector that has largely underperformed in recent years," said Adam Turnquist, chief technical strategist at LPL Financial.
What's Going On With Small Caps Vs. S&P 500?
Why the rally in small stocks all of a sudden? They've been ignored too long compared to the megacaps in the S&P 500, says Todd Rosenbluth, director of research at Vetta Fi.
"The valuation for small caps has been at a discount to historic levels making them attractive," Rosenbluth said. "If we get rate cuts starting in the fall, small caps will likely perform better. Small companies tend to incur more debt leverage than large caps. In addition if the U.S. economy strengthens into 2024, the less globally oriented small caps will be beneficiaries."
And investors aren't wasting any time jumping into small-cap ETFs to ride this wave. The 10 largest-by-assets small-cap ETFs are up an average of nearly 8% just this month. Additionally, it's a rally many investors are underexposed to due to their recent infatuation with giant stocks.
But that's changing.
Small-Cap ETFs Are All Different
There are dozens of small-cap ETFs for investors to choose from. But they vary from one another, sometimes in subtle ways.
Lately, investors have poured into the $66 billion-in-assets iShares Russell 2000 ETF, Rosenbluth says. It, like the SPDR Portfolio S&P 600 Small Cap ETF, weights holdings based on the stocks' market values.
And yet, the ETFs are different. SPSM follows an index with an earnings profitability screen. That seemingly small tweak "provides (SPSM) a high-quality tilt compared to IWM," Rosenbluth said. "IWM has more exposure to health care and less exposure to consumer discretionary stocks than SPSM."
More Small-Cap ETF Options Abound
Most of the largest and most-popular small-cap ETFs weight their holdings based on market values. But there are other options, too.
Two ETFs focused on small-cap fundamentals include ALPS OShares US Quality Dividend and VictoryShares Small Cap Free Cash Flow, Rosenbluth says. Both of these ETFs try to focus even more on higher quality small-cap companies. "OUSA screens for companies based on quality, low volatility and dividend growth attributes," he said.
And Fidelity Enhanced Small Cap ETF uses human stock pickers to find the best small-cap opportunities. "The fund converted into an ETF last year, but has a strong record of outperforming IWM through quantitatively driven security selection," he said.
Top Small Cap Stocks This Month
Based on iShares Core S&P Small-Cap ETF
| Company | Ticker | % gain one-month* | Sector |
|---|---|---|---|
| Sunrun | 44.9% | Industrials | |
| Pitney Bowes | 40.3% | Industrials | |
| 3D Systems | 31.9% | Industrials | |
| Uniti Group | 31.7% | Real Estate | |
| Forward Air | 31.0% | Industrials | |
| The Bancorp | 30.8% | Financials | |
| Arlo Technologies | 30.8% | Information Technology | |
| Customers Bancorp | 30.4% | Financials | |
| Nvidia ** | -4% | Information Technology |
