The top three Small Cap ETFs

Key points

• Small Cap stocks have outperformed large caps in recent weeks.

• Small caps have been historically strong in presidential election years.

• Here are the 3 best Small Cap ETFs to invest in now.

Small Cap stocks are starting to pop. Here are the 3 best ETFs to take advantage of their resurgence.

Small Cap stocks and ETFs have had a bit of a resurgence in recent weeks after lagging large caps the past couple of years.

Analysts had expected better results from small caps at the start of the year, after a strong fourth quarter of 2023. Many predicted the market to broaden beyond large caps this year and for small caps to outperform in 2024. But through the first half of the year, that did not happen, as large caps continued to dominate.

Year-to-date, the Russell 2000 is up 9.5%, while the S&P 500 is up 16.6%. But recently, the Russell 2000 has outperformed, rising 6% last week and another 3.4% this week. The resurgence could be a blip, or just delayed from what many analysts believe would happen this year.

In addition, small caps have historically performed well in presidential election years. A recent study by Lincoln Financial said small caps have beaten large caps in 7 of the last 11 presidential election years and have also outpaced large caps in the year after the election. So, this could be an opportunity for investors to take advantage of the trend.

A good way to tap into small caps is through ETFs. Here are 3 top small cap ETFs to consider.

Invesco S&P SmallCap Momentum ETF

The Invesco S&P SmallCap Momentum ETF (NYSEARCA: XSMO) has been one of the best performing small cap ETFs over the past year. It has a one-year return of 36% as of July 16 and is up 17% YTD.

This is a more concentrated small cap growth ETF, tracking the S&P SmallCap 600 Momentum Index. The ETF includes 120 stocks within the S&P SmallCap 600 that have the highest momentum scores, or upward price movements relative to other stocks within the index. This means that the fund includes the stocks with the most upside, at any given time. There is a lot of growth momentum right now, so it should outperform.

The top three holdings are Abercrombie & Fitch (NYSE: ANF), Insight Enterprises (NASDAQ: NSIT), and Fabrinet (NYSE: FN).

Invesco S&P SmallCap value with Momentum ETF

Yes, this is another Invesco ETF, but the asset manager boasts an excellent roster of small cap ETFs. The Invesco S&P SmallCap Value with Momentum ETF (NYSEARCA: XSVM) has been one of the best long-term small cap performers, with a five-year annualized return of 16.2%, which is the best in its class. Further, it has returned 6.5% YTD and has a one-year return of 21.9% as of July 16.

This ETF tracks the S&P 600 High Momentum Value Index, which is composed of 120 stocks in the S&P SmallCap 600 Index with the highest value scores and momentum scores. So, it includes stocks that have low valuations, yet also have upward price momentum. Stocks are weighted in the portfolio by their value scores.

Small caps stocks are very undervalued in general, after a couple of years of lagging returns. This fund is attractive because it includes those value stocks that are on the move.

The three largest holdings in the ETF are Kelly Services (NASDAQ: KELYA), Kohlʻs (NYSE: KSS), and Par Pacific Holdings (NYSE: PARR).

Principal US Small Cap ETF

The Principal U.S. Small Cap ETF (NASDAQ: PSC) has also been one of the best long-term ETFs in its class with a five-year annualized return of 12.1% as of July 16. Further, it has returned 22.6% over the past year and is up 14.3% YTD.

This ETF is actively managed and has beaten the Russell 2000 benchmark over the one, three, and five-year periods. The managers — Christopher Ibach and Aaron Siebel — seek out high quality small caps that are both good values and have strong momentum. They also avoid fundamentally distressed companies.

With this ETF, you get the benefit of professional management to make the necessary changes as the markets shift. The portfolio managers have 49 years of portfolio management experience between them.

The portfolio includes 500 stocks, so it is broadly diversified within the small cap universe. The top three holdings are Lantheus Holdings (NASDAQ: LNTH), Jackson Financial (NYSE: JXN), and Super Micro Computer (NASDAQ: SMCI).

These three small caps ETFs all complement each other well, bringing growth, value, and a more broadly diversified strategy that is actively managed. All would be good additions to a portfolio, particularly now as small caps seem to be on the move.