5 Small-Cap ETFs That Outperformed Russell 2000 in the Last 3 Months

In the past three months, small-cap exchange-traded funds (ETFs) have been performing exceptionally well, largely due to positive sentiment surrounding the policies of President-elect Donald Trump. This optimism suggests that small-cap companies may experience faster economic growth compared to their larger counterparts. For instance, the iShares Russell 2000 ETF (IWM) rose by 9.4%, while the SPDR S&P 500 ETF Trust (SPY) saw an increase of 7.5%.

Among the many ETFs that have benefitted from this trend, five small-cap funds have stood out for their strong performance. These include Motley Fool Small-Cap Growth ETF (TMFS), First Trust Small Cap Growth AlphaDEX Fund (FYC), Vanguard Small-Cap Growth ETF (VBK), Janus Henderson Small Cap Growth Alpha ETF (JSML), and First Trust Dow Jones Select MicroCap Index Fund (FDM).

Reasons Behind the Outperformance

The rise in small-cap ETF values can be attributed to various proposed policies from Trump's administration that could stimulate the U.S. economy. One of the significant policies he suggested is a reduction in the corporate income tax rate from 21% to 15%, along with extending previous tax cuts that are set to expire soon. Lower tax rates mean higher profits for smaller companies, thus enhancing their growth potential.

Moreover, Trump's focus on deregulation across multiple sectors—including energy and finance—can significantly lower the compliance costs for small businesses. These companies often do not have the same financial resources as large corporations to handle complicated regulations. By reducing these burdens, small-cap firms can increase their overall profitability and operating efficiency.

Additionally, Trump's proposed tariffs aimed at major trade partners are expected to bolster the U.S. dollar. A stronger dollar usually benefits small-cap companies, which have limited exposure to international markets. This means that domestic producers could gain an advantage as foreign competitors face higher import costs due to tariffs.

Furthermore, the current low-interest-rate environment is favorable for smaller companies, which often carry a higher debt burden. Lower rates reduce their borrowing costs, allowing for easier expansion and higher profitability. This contributes to a more robust economic growth outlook.

Since small-cap companies are closely tied to the domestic economy, they are likely to benefit the most as economic conditions improve. Federal Reserve Chair Jerome Powell has indicated that the U.S. economy is doing well, and data such as the Beige Book has shown continued growth in economic activity.

Small-cap stocks are also regarded as safer investments during times of political and economic uncertainty. Given the global tensions, including those in the Middle East and the ongoing situation in Ukraine, investors may find small-cap investments more appealing as a hedge against volatile conditions.

Highlighted ETFs

Motley Fool Small-Cap Growth ETF (TMFS)

This ETF targets high-quality small-cap U.S. companies that are often overlooked. It focuses on innovative firms believed to have growth potential and includes 35 stocks from various sectors like industrials, technology, and healthcare. With around $100.9 million in assets and an expense ratio of 0.85%, it has an average trading volume of 13,000 shares.

First Trust Small Cap Growth AlphaDEX Fund (FYC)

FYC offers diversification through small-cap growth stocks and follows the Nasdaq AlphaDEX Small Cap Growth Index. It comprises a well-balanced portfolio of 264 stocks, ensuring that no single stock makes up more than 1.4% of its total holdings. The fund manages approximately $449 million and charges 0.71% in fees, with an average daily trading volume of 35,000 shares.

Vanguard Small-Cap Growth ETF (VBK)

This ETF is designed to track the CRSP US Small Cap Growth Index, containing 610 stocks with significant exposure to the technology sector (21.4%). Vanguard maintains $20.7 billion in assets for this fund, which has a low fee of 0.07% and sees an average trading volume of around 255,000 shares daily.

Janus Henderson Small Cap Growth Alpha ETF (JSML)

JSML focuses on resilient growth companies with proven operational excellence, providing investors with small-cap growth opportunities. It holds 206 stocks, primarily in sectors such as industrials, healthcare, and technology. The fund has approximately $267.1 million in assets, with an expense ratio of 0.30% and an average daily volume of 8,000 shares.

First Trust Dow Jones Select MicroCap Index Fund (FDM)

This fund tracks the Dow Jones Select Microcap Index and includes stocks that are liquid and possess strong fundamentals. It holds 140 stocks, mainly concentrated in finance, industrials, consumer discretionary, and energy sectors. FDM has $188.8 million in assets and charges 0.60% in fees with an average trading volume of 16,000 shares.

Small-Cap, ETFs, Outperformance