Small-cap ETFs can help you ride out a recession, says Bank of America
It might be time for small caps to take the lead, and several exchange-traded funds offer smart exposure to this part of the market, according to Bank of America. ETF strategist Jared Woodard said in a note to clients on Monday that the macro environment, as well as early earnings season trends, point to a period of outperformance for small caps. “Small caps enjoy much better earnings forecasts, have held up better in inflationary/stagflationary environments, and benefit from even better trends in services > goods spending,” the note said. The Russell 2000 Small Cap Index has fallen around 19% this year, slightly underperforming the S&P 500 and the Russell 1000. If small caps start to close the gap, it could be value stocks that would lead the way, Woodard said. “Value has tended to outperform growth within small caps during recessions (and over the longer term), and [strategist] Jill Hall currently favors value factors such as free cash flow,” the Bank of America note said. Bank of America upgraded a value-focused fund to buy on hold Monday. the highest rated small cap fund for Bank of America. It has a four-star rating from Morningstar and an expense ratio of 0.59. The Pacer fund contains the stocks with the highest free cash flow in the S&P 600, with top holdings including VIR Biotechnology, Academy Sports & Outdoors and Korn Ferry. The fund is down about 14% for the year. Source: Bank of America Bank of America has two other small-cap funds with buy ratings, and these are Vanguard’s small-cap value (VBR) and small-cap growth (VBK) funds. Like most Vanguard funds, small-cap vehicles enjoy low fees. Both funds have an expense ratio of just 0.07%. – CNBC’s Michael Bloom contributed to this. report.