Small-Cap ETFs Set to Explode Under Trump Presidency

The Russell 2000 Index, which tracks US small-cap companies, rose about 6% to near-record highs and recorded the largest single-day gain in two years. The astounding surge came in the wake of Donald Trump’s victory in the presidential election.

Analysts expect Trump's victory to lead to faster economic growth and more market-friendly policies. This is because Trump supports lower corporate tax rates, deregulation and other policies that favor domestic growth, all of which would provide more stimulus to the U.S. economy and benefit riskier assets. The anticipation of greater tariff barriers and a step to move manufacturing back home will drive small-cap stocks higher (read: ETFs Set to Soar on Trump's Presidential Victory).

In order to tap this trend, investors should consider small-cap ETFs for diversified exposure across several sectors. We have highlighted five funds that have a Zacks ETF Rank #2 (Buy) each, suggesting their outperformance in the coming weeks. These are iShares Core S&P Small-Cap ETF IJR, iShares Russell 2000 ETF IWM, Vanguard Small-Cap ETF VB, Schwab U.S. Small-Cap ETF SCHA and SPDR Portfolio S&P 600 Small Cap ETF SPSM.

Corporate Tax Cuts

Trump recently proposed reducing the statutory corporate income tax rate from 21% to 15%. He also promised to extend tax cuts passed during his first term — set to expire at the end of next year. With reduced tax expenses, profits for smaller companies will grow.

Deregulation

Trump’s administration is focused on deregulating many industries like energy and finance aiming to reduce the compliance costs, which businesses face. For small-cap companies, which often lack the financial resources of larger firms to manage regulatory compliance, reduced regulations mean lower operational costs. This shift will allow small-cap businesses to operate with increased profitability.

Protectionist Stance

Trump’s proposed tariffs against major U.S. trading partners would boost the greenback. A strong dollar provides an edge to domestic-focused companies as small caps do not have much exposure to the international market. As such, Trump's protectionist stance will benefit domestic producers, as higher import tariffs raise costs for foreign competitors.

More Rate Cuts in the Cards

After initiating a 50-bps rate cut in September, the Fed is expected to cut interest rates further this year. As the pint-sized companies have a higher debt burden (mostly at floating rates), lower rates lead to reduced borrowing costs, helping small businesses expand their operations easily and resulting in increased profitability. This, in turn, stimulates economic growth. As small-cap companies are more domestically tied, these are poised to outperform when the economy improves.

Geopolitics

Small-cap stocks are considered safer and better plays if political issues or economic turmoil creep into the picture. Escalating tensions in the Middle East and the ongoing Russia-Ukraine war are driving the appeal for small-cap stocks.

ETFs Set to Explode

iShares Core S&P Small-Cap ETF (IJR) 

iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. iShares Core S&P Small-Cap ETF holds 662 stocks in its basket, with none accounting for more than 0.8% of the assets. Financials, industrials, consumer discretionary and information technology are the top four sectors with double-digit exposure each. 

iShares Core S&P Small-Cap ETF is the largest and most popular ETF in the small-cap space, with AUM of $85.3 billion and an average daily volume of 3 million shares. The product charges investors 6 bps in annual fees.

iShares Russell 2000 ETF (IWM)

iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $68.9 billion and an average daily volume of 33 million shares. It tracks the Russell 2000 Index and holds well-diversified 1,973 stocks in its basket. IWM has key holdings in financials, healthcare, industrials and information technology.

iShares Russell 2000 ETF charges 19 bps in annual fees (read: ETF Strategies to Consider as Trump Nears Victory).

Vanguard Small-Cap ETF (VB) 

Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,384 stocks, with none holding more than 0.5% of the assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five.

Vanguard Small-Cap ETF has AUM of $60.5 billion and trades in a solid average daily volume of about 549,000 shares. VB charges 5 bps in fees per year from investors. 

Schwab U.S. Small-Cap ETF (SCHA)
 
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,745 stocks in its basket. Each security accounts for less than 0.3% of the assets. Schwab U.S. Small-Cap ETF is widely spread across sectors, with financials, industrials, health care, information technology and consumer discretionary having double-digit exposure each. 

Schwab U.S. Small-Cap ETF has AUM of $18 billion and sees a solid volume of around 1 million shares a day. It has an expense ratio of 0.04%. 

SPDR Portfolio S&P 600 Small Cap ETF (SPSM)

SPDR Portfolio S&P 600 Small Cap ETF follows the S&P Small Cap 600 Index, holding 605 stocks in its basket. None of the firms make up more than 0.7% of the assets. SPDR Portfolio S&P 600 Small Cap ETF is also widely spread out across sectors, with financials, industrials, consumer discretionary, information technology and healthcare having double-digit exposure each. 

SPDR Portfolio S&P 600 Small Cap ETF has been able to manage $11.9 billion in its asset base and trades in a good volume of 1.3 million shares a day on average. SPSM charges 3 bps in annual fees.

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