Small Caps Outperform to Start 2021: 5 Best ETFs of Last Week

After the worst start in five years, Wall Street rebounded strongly in the first week of 2021 with small caps leading the way higher. This is especially true as the Russell 2000 Index is up 5.9%, outperforming the gains of 4.8% for the S&P 400 Mid Cap Index and 1.8% for the S&P 500 Index.

Although worries over a prolonged coronavirus crisis made investors jittery, a combination of factors including vaccine rollout and super easy policies continued to charge the bulls.
The wider reach of coronavirus vaccine is expected to the end of the pandemic, resulting in higher demand for all types of products and services in the economy.

As small-cap companies are closely tied to the U.S. economy, 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. Meanwhile, 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 domestically focused companies.

Further, hopes of a bigger fiscal package and infrastructure spending under a Democratic-led U.S. Congress propelled optimism in the stock market. Joe Biden promised to deliver an economic stimulus package worth trillions of dollars once he takes office on Jan 20. Moreover, the “January Effect,” which is a seasonal increase in stock prices largely due to year-end tax considerations, has been fueling a rally in the small-cap space (read: 5 Small-Cap ETFs & Stocks to Make the Most of January Effect).

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

Amplify Seymour Cannabis ETF CNBS – Up 18.6%

With AUM of $30.1 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 23 securities and charges 75 bps in annual fees. It trades in an average daily volume of 78,000 shares (read: Cannabis ETFs Soar on News of Democrat's Winning Senate).

Invesco S&P SmallCap Energy ETF PSCE – Up 15.9%

This fund provides exposure to the U.S. small-cap segment of the energy sector by tracking the S&P Small Cap 600 Capped Energy Index. It holds 34 stocks in its basket with AUM of $32.9 million. The fund trades in an average daily volume of 140,000 shares and charges 29 bps in fees per year. It has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

AdvisorShares Dorsey Wright Micro-Cap ETF DWMC – Up 11.8%

This is an actively managed ETF seeking long-term capital appreciation by investing in exchange-listed micro-cap equities. It follows Nasdaq Dorsey Wright’s core philosophy of relative strength investing – a proprietary systematically-driven methodology that buys securities that have appreciated in price more than other equities within its investment universe and holding those securities until they exhibit sell signals. The fund holds 155 securities with key holdings in industrials, consumer cyclical, healthcare and technology. It charges 1.32% in annual fees and trades in meager volume of under 1,000 shares. The fund has AUM of just $3 million.

Invesco S&P SmallCap Materials ETF PSCM – Up 10%

This fund offers exposure to companies that are principally engaged in producing raw materials, including paper or wood products, chemicals, construction materials, and mining and metals. It follows the S&P SmallCap 600 Capped Materials Index, holding 37 securities in its basket. From an industrial look, chemicals takes the largest share at 50.1% followed by metals & mining (36.1%), and paper & forest products (7.5%). The fund has AUM of $13.9 million and trades in volume of 3,000 shares a day on average. It charges 29 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 5 Small-Cap Sector ETFs Beating the Russell 2000).

Invesco KBW Regional Banking ETF KBWR – Up 9.1%

This fund offers exposure to companies primarily engaged in U.S. regional banking activities and follows the KBW Nasdaq Regional Banking Index. Holding 50 stocks in its basket, it is a relatively less-popular and less-liquid option in the space, with AUM of $44.3 million and an average daily volume of 9,000 shares. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a High risk outlook.

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Invesco KBW Regional Banking ETF (KBWR): ETF Research Reports
 
Invesco S&P SmallCap Materials ETF (PSCM): ETF Research Reports
 
Invesco S&P SmallCap Energy ETF (PSCE): ETF Research Reports
 
AdvisorShares Dorsey Wright MicroCap ETF (DWMC): ETF Research Reports
 
Amplify Seymour Cannabis ETF (CNBS): ETF Research Reports
 
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