The Equity ETF Idea
With all the press given to the returns being generated by big tech names, such as Netflix (NFLX), Microsoft (MSFT), and NVIDIA (NVDA), in 2018, it might be easy to overlook the fact that a new group has taken leadership in the equity markets this year – small caps! We really haven’t been able to say that much lately. Small caps rallied hard following Donald Trump’s election win in 2016, as his pro-business growth agenda was seen as particularly beneficial to smaller businesses. Prior to that, however, the last time that small caps led large caps was in 2013.
In 2018, the iShares Core S&P Small-Cap ETF (IJR) has returned 7.4% compared to a 1.2% gain for the SPDR S&P 500 ETF (SPY). A big reason for this is corporate tax reform. Small caps, in general, derive most if not all of their revenue domestically, which means they see a greater positive impact from lower corporate tax rates. Small caps also tend to respond quicker and better to a strong economy. Another big benefit right now is that these U.S.-centric businesses can avoid a lot of the impact from a potential trade war with China as well as problems from areas, such as Italy, Turkey, and Brazil.
Another plus right now is valuation. According to Yardeni Research, the S&P 600 Small-Cap index is trading at a forward P/E of just over 17. That’s not much higher than the S&P 500, which trades at just over 16 times forward earnings. IJR is a good option for broad small-cap coverage and has relatively little invested in the rate-sensitive real estate and utility sectors.
The Fixed Income ETF Idea
Smart beta and factor investing are prevalent in the equity markets but not so much in the bond world.