Wall Street has been on a roller-coaster ride this year. Yet, the small-cap segment of the broader market has been outperforming, defying extremely volatility. This is especially true as the Russell 2000 is nearing its record levels with just less than 1% away from its peak.
Why Small Caps?
Global sentiments have been deteriorating due to lack of progress in U.S.-China trade talks, downbeat economic data across many parts of the world and Trump's decision to re-impose sanctions on Iran, which has intensified the geopolitical risk. All these weighed on large-cap stocks but benefited the small caps as these are insulated from international headwinds, including trade policy and geopolitical tensions. These are considered safe and better plays if political issue or economic turmoil creeps into the picture.
As the pint-sized stocks are closely tied to the U.S. economy and do not have much exposure to the international market, an encouraging domestic economic trend backs their momentum. The U.S. economy has entered its second-longest expansion phase since 1785, thanks to higher consumer spending, rising consumer confidence, low borrowing cost, growing wages, and solid hiring. In particular, consumers were more confident in April, with consumer confidence index rebounding to an 18-year high, indicating solid economic growth prospects.
Additionally, small-cap stocks are the biggest beneficiaries of the tax cut as these pay higher taxes with a median effective tax rate of 31.9%. In comparison, the larger, multi-national companies on the S&P 500 pay a lower median effective tax rate of 28%, while the tax rate for 30 mega-cap stocks on the Dow Jones Industrial Average is even low at 23.8%.
Further, these stocks get a boost from the strength in greenback and lately due to rising yields.
Given this, we have highlighted five ETFs that hit all-time highs in the last trading session. Any of these could be excellent plays for investors seeking true domestic exposure and have the potential to move even higher as long as international headwinds persist. All these funds have a Zacks ETF Rank #3 (Hold):
