It seems that finally the time has come for the Fed dove to fly out of the U.S. border. In its latest October meeting, the central bank remained accommodative but hinted at the potential hawkish stance in its mid-December meet. Agreed, a slower rate hike trail will be enacted when the step is actually taken, but such an indication was strong enough to turn investors – who were betting on a 2016 lift-off – a spoil sport and make them hurry for investments which are impervious to rate hike, either way or other.
Plus, in early November, the Fed chair Janet Yellen noted that the U.S. economy is ‘performing well’. Along with the Fed signal, the economic pointer also corroborates the underlying U.S. economic strength. A strong U.S. October job report, per which the nonfarm payrolls increase represented the highest advance in 10 months and unemployment dropped to the lowest level in seven and a half years, buoyed up the December rate hike possibility further.
Quite expectedly, the U.S. dollar soared to its seven-month high which will likely make exports pricier, thereby hurting earnings of the large-cap American firms with considerable foreign exposure. Moreover, the confidence in the international economy is yet to gain ground.
Continuous dismal data out of China, the return of deflationary fears in the Euro zone and a still-sagging Japanese economy talk of anything but a steady international economic backdrop. All these global threats will naturally weigh on large-cap stocks and the related ETFs as this capitalization derives a larger part of its revenues from outside the country. All these set the stage for small-cap investing on fire (read: ETF Strategies for 2H).
Why Small-Caps?
Investors should note that small-cap stocks indicate the health of the domestic economy. These securities tend to have less connection to the global trends and offer investors a great deal of opportunities to cash in on the domestic economic outperformance. As a result, this capitalization is not exposed to the dollar strength.
For obvious reasons, small cap stocks are broadly leading the market post the return of lift-off talks in the market from October end and have comfortably surpassed their large cap cousins. The ultra-popular small cap ETF (IWM) was up over 1.4% in the last five trading sessions (as of November 6, 2015) against 0.2% loss by SPDR S&P 500 ETF Trust (SPY) (read: Can These Top-Ranked Small Cap Growth ETFs Win in 2015?).
Why Growth ETFs?
Yet not all small caps returned equally with some being more focused on value and others targeting the growth segments of the market. Arguably, growth firms are seen as engines that offer above-average revenue and earnings growth with high price-to-book ratio but yield lower than the value and blend counterparts. Since the U.S. economy has taken root, this section should perform well. Growth funds also rise more than the other funds in the booming market and vice versa.
To sum up, small cap growth funds are poised for healthier returns. Below, we have highlighted three Buy-rated small-cap growth ETFs that are easily beating the overall market amid the ongoing Fed-induced volatility (see: all the Small Caps ETFs here).
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