5 Small-Cap ETFs at the Forefront of the 2021 Market Rally

Wall Street has been enjoying a series of record highs lately with small-cap stocks leading the way higher. This is especially true as the Russell 2000 Index is up 15.6% so far this year, outperforming the gains of 9.2% for the S&P 400 Mid Cap Index and 4.1% for the S&P 500 Index.

The outperformance was driven by renewed optimism over speedy economic recovery from the pandemic-driven recession given hopes of further fiscal relief package, signs of a healing labor market, continued progress in more vaccines and a rapid vaccination rollout. The combination of all these factors will lead to pent-up demand resulting in higher demand for all types of products and services in the economy.

As small-cap companies are more domestically tied, these are poised to outperform when the economy improves. These pint-sized stocks generate most of their revenues from the domestic market, making them great choices during an uptrend (read: 5 Niche ETFs That Led the Market Rally Higher Last Week).

Additionally, the Fed pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. A low interest rate bodes well for small-cap stocks as it pushes up economic activities and results in higher spending, thus boosting the domestically focused companies.

Further, the widening U.S. Treasury yield curve (the 5-year/30-year spread rose to 1.5% on Feb 8, the highest since September 2015) also provides a boost to the small-cap stocks. This is because banks and financial services companies, which see their share prices rise as longer-dated bonds' yields go up, are over-represented among small-cap indexes.

Given this, there have been winners in several corners of the small-cap space. Below we have presented five ETFs that are easily crushing the Russell 2000 Index this year and are likely to continue their strong performance at least in the near term.

Amplify Seymour Cannabis ETF CNBS – Up 128.6%

With AUM of $73 million, CNBS is actively managed and invests 80% of its assets in securities of companies with 50% or more of their revenues from the cannabis and hemp ecosystem. The fund holds 26 securities and charges 75 bps in annual fees. It trades in an average daily volume of 132,000 shares (read: Cannabis ETFs Spike on Jazz-GW Pharma Deal).
    
Pacer US Small Cap Cash Cows 100 ETF CALF – Up 21.2%

It is a strategy-driven ETF and aims to provide capital appreciation over time by screening the S&P SmallCap 600 Index for the top 100 companies based on free cash flow yield. CALF tracks the Pacer US Small Cap Cash Cows Index and holds 100 stocks in its basket. Consumer discretionary takes the top spot at 44.9% of assets followed by industrials (22.1%). The fund has amassed $105.7 million in its asset base and trades in an average daily volume of 49,000 shares.

ALPS Medical Breakthroughs ETF SBIO – Up 20.7%

This fund provides exposure to companies with one or more drugs in phase II or phase III FDA clinical trials by tracking S-Network Medical Breakthroughs Index. It holds 91 securities in its basket. The product charges 50 bps in fees per year from its investors and trades in a moderate average daily volume of about 29,000 shares. It has AUM of $292.7 million in its asset base and carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: A Guide to Biotech ETF Investing Amid the Coronavirus Crisis).

Invesco S&P SmallCap Value with Momentum ETF XSVM – Up 19.3%

This fund offers exposure to the companies having the highest "value scores" and "momentum scores" by tracking the S&P 600 High Momentum Value Index. It holds a basket of 120 stocks with AUM of $125.1 million and an average daily volume of 38,000 shares. Consumer discretionary and financials take the largest share at 25% and 21.4%, respectively, while industrial rounds off the next spot with double-digit exposure. The ETF charges 39 bps in annual fees.

BlackRock Future Innovators ETF BFTR – Up 19.2%

This find is actively managed providing diversified exposure to innovative companies across sectors in the small/mid cap growth category that may deliver growth and capital appreciation. It holds 62 stocks in its portfolio with key holdings in information technology, healthcare and consumer discretionary. BFTR is the new entrance in the small-cap space, having accumulated $12 million in its asset base since its inception in October 2020. It charges 80 bps in annual fees and trades in a light volume of 7,000 shares.

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