The U.S. stock market staged a nice comeback this month after Donald Trump won the presidential election and instilled confidence in the market with his proposed policies. Trump has promised to accelerate economic growth, spend big time on infrastructure, reduce regulations, cut taxes and create more jobs in the country (read: ETFs & Stocks That Topped or Flopped After Trump Won).
Additionally, the Fed in its latest testimony, hinted at a sooner-than-expected rates hike (might be in December) as the U.S. economy has been on a solid footing with an improving housing market, rising consumer prices and a robust labor market. All these factors are propelling the stocks higher. Further, the return to earnings growth and holiday optimism added to the strength.
While large caps have grabbed investors’ attention, small caps could arguably be better plays in the current environment, as these are safer and better positioned should any political or economic issue creep into the picture. Notably, the ultra-popular small-cap ETF IWM has surged 12.8% so far this month compared to gains of 8.5% for the mid-cap counterpart IJH and 3.8% for the large-cap cousin SPY.
Why Small Caps?
Trump’s massive stimulus policies should benefit small caps more as these are closely tied to the U.S. economy and generate most of their revenues from the domestic market. Being U.S. focused, a rising dollar will have negligible impact on these pint-sized companies (read: ETF Winners & Losers as Dollar Hits 13-Year High).
Small-cap stocks generally outperform when the American economy is leading the way. Since these companies are small, they are poised to grow more than their already tapped out large-cap counterparts. Additionally, comparatively higher weightings to healthcare and financials – the two sectors that Trump loves – have given an edge to the Russell 2000 Index. Trump seeks fewer regulations in these sectors.
Further, Trump’s proposed renegotiation or termination of the North American Free Trade Agreement and building of a Mexico wall would favor small-cap stocks in case it results in a trade war or a tariff increase as expected.
How to Play?
Given this, investors are seeking to capitalize this opportune moment for big gains in a short span. For them, a leveraged play on small caps could be an excellent idea as these could lead to huge gains in a very short timeframe when compared to simple products. Below, we highlight several products that could garner huge profits from the soaring stock market in a short span (see: all the Small Caps ETFs here):
ProShares Ultra Russell2000 UWM
This product provides two times (2x) exposure to the daily performance of the Russell 2000 Index. It has been able to manage $220.7 million in its asset base and trades in a good volume of about 155,000 shares per day on average. Expense ratio is 0.95%. UWM is up 26.8% this month.
Direxion Daily Small Cap Bull 1.25x Shares LLSC
This ETF offers 125% exposure to the Russell 2000 Index and is the cheapest choice in the small-cap leveraged space, charging 35 bps in annual fees. It has accumulated $6 million in its asset base while trades in a meager volume of 200 shares a day on average. It has added 11.2% so far this month.
Direxion Daily Small Cap Bull 3x Shares TNA
This product provides a triple leveraged play to the small-cap Russell 2000 Index, charging 95 bps in fees and expenses. It has amassed $638.3 million in its asset base and sees solid volume of 4 million shares a day on average. TNA surged 41.8% in the same time frame (read: 6 Leveraged ETFs Soaring on Trump Rally).
ProShares UltraPro Russell2000 URTY
This fund also provides a triple exposure to the small-cap Russell 2000 Index with a similar expense ratio. However, it is less popular and less liquid than TNA with AUM of $134.9 million and average daily volume of 159,000 shares. URTY climbed 41.9% this month.
Direxion Daily Small Cap Bull 2x Shares SMLL
This ETF also seeks two times exposure to the daily performance of the Russell 2000 Index. It is less expensive, charging 60 bps in fees per year from investors. The fund trades in a paltry volume of just 300 shares and has only $2.6 million in AUM. The fund added 29.8% so far this month.
ProShares Ultra SmallCap600 SAA
This fund seeks to deliver two times the performance of the S&P SmallCap 600. It is an unpopular and illiquid option in the leveraged small cap space with AUM of $23 million and average daily volume of 1,000 shares a day on average. It charges 95 bps in annual fees and has gained 31.4% this month.
As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures (see: all Leveraged Commodity ETFs here).
Still, for ETF investors who are bullish on the small cap space for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.
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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-R 2000 (IWM): ETF Research Reports
DIRX-SC BULL 3X (TNA): ETF Research Reports
PRO-ULTR R2000 (UWM): ETF Research Reports
DIRX-D SCB125 (LLSC): ETF Research Reports
ISHARS-SP MID (IJH): ETF Research Reports
PRO-ULT R2000 (URTY): ETF Research Reports
DIR-D SC BL2 (SMLL): ETF Research Reports
PRO-ULTR SC600 (SAA): ETF Research Reports
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report IWM Research -- Mutual Funds Top 10 Holdings include "IWM"
IJH Research -- Mutual Funds Top 10 Holdings include "IJH"
SPY Research -- Mutual Funds Top 10 Holdings include "SPY"
UWM Research -- Mutual Funds Top 10 Holdings include "UWM"
LLSC Research -- Mutual Funds Top 10 Holdings include "LLSC"
TNA Research -- Mutual Funds Top 10 Holdings include "TNA"
URTY Research -- Mutual Funds Top 10 Holdings include "URTY"
SMLL Research -- Mutual Funds Top 10 Holdings include "SMLL"
SAA Research -- Mutual Funds Top 10 Holdings include "SAA"