New York, NY - Investors in small-cap stocks experienced their most robust monthly gains since November 2020, with the Russell 2000 index surging over 12% in April. This performance even outpaced the S&P 500's 10.4% advance for the month.
Bank of America strategists, led by equity and quantitative strategist Jill Carey Hall, are optimistic about the sector's future. In a recent report, they stated, "Small caps have outperformed [year to date] and we expect them to continue to lead, driven by an EPS/manufacturing recovery."
For investors looking to capitalize on this trend, Bank of America suggests exploring opportunities beyond the broad small-cap benchmark through active management or by focusing on specific themes within the sector. They highlighted several exchange-traded funds (ETFs) that offer diversified exposure to high-potential small-cap companies.
Key Investment Opportunities Identified:
1. iShares US Small-Cap Equity Factor ETF (SMLF)
This ETF stands out for its focus on profitable companies, with over 80% of its holdings being profitable compared to about two-thirds in the Russell 2000. SMLF boasts a five-star rating from Morningstar and has delivered over 11% returns year-to-date, with an expense ratio of 0.15%. Notable holdings include nVent Electric, which has seen a more than 65% increase this year, and Apple supplier Jabil, up 48%.
2. Janus Henderson Small Cap Growth Alpha ETF (JSML)
Ideal for investors targeting companies with rapidly increasing earnings estimates, JSML leads small-cap ETFs in its earnings revisions ratio, according to Bank of America's research. The fund is up nearly 14% year-to-date with a 0.30% expense ratio. Key investments include Bloom Energy, a data center power play up over 230% this year, and data infrastructure firm Credo Technology, up 35%.
3. Avantis International Small Cap Value ETF (AVDV)
For those seeking international diversification, AVDV offers exposure to global small-cap value stocks. It has returned 13% year-to-date with a 0.36% expense ratio. Bank of America notes that AVDV has outperformed U.S. large growth stocks since the COVID-19 pandemic, offering lower valuations and reduced market correlation.
Diversification Strategy:
While the current performance of small caps is encouraging, financial experts advise a balanced approach. Gabriel Shahin, a certified financial planner and founder of Falcon Wealth Planning, suggests a 5% to 10% allocation towards small caps for diversification. He emphasizes the importance of due diligence, including analyzing balance sheets and revenue growth, which may favor an active investment strategy in this historically inefficient asset class.
Reporting contributed by Michael Bloom.
