Though the U.S. markets performed reasonably well during the final quarter of 2013, they lost strength in the first quarter of this year. Beginning of the end of the era of cheap money, emerging market turmoil, concerns over slowdown in China, the second largest economy and geo-political crises in Russia dampened spirits.
However, the chilly U.S. weather was deemed to be the main spoilsport for the slowdown in the broader economy in the first quarter. Things are expected to turn around this quarter with the economy returning to health. The recent in line Jobless Claims and Trade Deficit data point towards the improving tone in economic activity.
Along with this the strengthening job market, rebounding auto sales and increasing consumer spending all signal toward improving domestic strength. Given the improving domestic market, smaller companies are expected to be the primary beneficiaries.
In fact, small cap stocks have outperformed large cap stocks over the past five years. The Russell 2000 Index of small cap stocks has generated a compounded five-year return of 152.27%, against 120.5% generated by the large cap index, S&P 500 (read: 3 Small Cap ETFs Surging in the Past Month).
Small cap companies usually focus more on the domestic segment as compared to larger companies which have a more international exposure. Small caps are thus expected to deliver superior returns than their larger counterparts.
Growth in Focus
Growth stocks usually enjoy a competitive edge against their competitors. This is due to the fact that growth companies primarily reinvest a major portion of their retained earnings in capital projects and pay out smaller dividends.
However, it is worth noting that growth stocks have comparatively higher P/B, P/S and P/E ratios and exhibit a higher degree of volatility especially compared to value stocks.
Thus, given the strengths and weakness of small cap growth stocks, a look at a top ranked small cap ETF will be a good idea to capture a surge, especially based on our Zacks ETF Ranking system.