This summer, all eyes have been on small-cap stocks. After a period of underperformance, small-cap stocks in the UK and US have made a comeback. And now might be a good time to add them to your portfolio!
According to a recent report from JP Morgan, US small caps have rallied over nine percent whereas the S&P 500 has grown just over two percent and the NASDAQ is floating at one percent.
Many believe that this marks the beginning of a resurgence for small caps. For the first half of 2024, large-cap stocks carried the US market, outperforming small caps by more than 16 percent. However, It looks like things have changed!
This isn’t just happening in the US market. The FTSE Small Cap index has grown by 11.42 percent over the last six months whereas its large cap sibling, the FTSE 100, has grown by only 10.17 percent.
Although the difference between large caps and small caps in the UK market may not be as dramatic, it is still clear that now is the time for small caps to shine!
Why is now a good time to invest in small caps?
So, why have small cap stocks had such a good run recently? According to the Chief US market strategist at Morningstar, small market cap stocks are the most undervalued. At the beginning of July, US small caps traded at a 20 percent discount from fair value, which leaves a lot of room for growth!
On the other hand, large-cap stocks are currently overvalued which means that a correction could be on the way and there is little room for further growth.
Buying whilst the market is undervalued is a good way to increase your chances of seeing returns. Therefore, now might be a good time to add some small caps to your investment pot!
Three Small Cap Funds That I’m Watching Right Now
Picking out individual stocks to invest in is no easy feat! Instead, investing in small cap ETFs is a great way to gain exposure to the market whilst diversifying your investment across a range of companies.
Here are three small cap ETFs that I’m watching right now.
iShares Russell 2000 ETF
First up is the iShares Russell 2000 ETF (IWM), a fund that’s often considered the go-to choice for small cap enthusiasts.
This is a US ETF, suitable for investors who are comfortable with investing overseas. This ETF tracks the Russell 2000 Index, which is composed of the 2,000 smallest stocks in the Russell 3000 Index.
The iShares Russell 2000 ETF boasts a diverse range of stocks across various sectors. Some of its top holdings include, NOV Inc, Zebra Technologies Corp, IDEX Corp.
Investing in the iShares Russell 2000 ETF can be a smart move because it gives you broad exposure to a variety of high-potential small companies. The fund’s diversity helps mitigate some of the risks associated with individual small cap stocks.
FTSE Small Cap Fund
If you would like to stick to UK markets, this one’s for you! This fund tracks the FTSE Small Cap Index, which includes companies that are smaller in size compared to those in the FTSE 100 or FTSE 250 but still have substantial growth potential.
The FTSE Small Cap Fund holds a variety of stocks across different sectors, providing a broad exposure to the UK’s smaller companies. Some notable holdings are: Dunelm Group Plc, Greggs Plc, Hollywood Bowl Group Plc.
The FTSE Small Cap Fund is ideal for those looking to diversify their portfolio with smaller UK companies that have significant growth potential.
The FTSE Small Cap has a robust history of outperforming the FTSE 100 long-term.
iShares MSCI UK Small Cap UCITS ETF
Another excellent option for investors who want to stick to the UK stock market is the iShares MSCI UK Small Cap UCITS ETF. This is a fund that aims to track the performance of the MSCI UK Small Cap index.
The index tracks UK small cap stocks such as Dechra Pharmaceuticals Plc, Marks and Spencer Group, and Rightmove. Similar to the FTSE Small Cap, the stocks have a lot of potential for growth and tend to perform well long term.
Investing in small-cap funds is most suitable for investors who plan to hold their investments long-term. It can take years for undervalued stocks to reach their true value so don’t be expecting any short-term profits!
Before you go ahead and add any small-cap ETFs to your portfolio, it is important to conduct thorough research, assess your risk appetite and make sure that the investment aligns with your strategy.
I have an excellent guide on how to research stocks over on The MoneyMagpie that you can use to get started.
Jasmine Birtles is the founder of the financial website MoneyMagpie.com. Get a FREE ebook on how to get shareholder perks by signing up to their free investing newsletter here.
