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Small-cap ETFs have great potential, says BofA




Investors have many reasons to consider exchange-traded funds made up of small companies, according to a recent study by BofA, which also makes recommendations on which funds to consider. Tip: Small is also better than large when it comes to costs.

Among other things, BofA’s team of analysts, led by Jared Woodard, are aware that U.S. economic growth is expected to rise over the next two years, and its economists forecast 7% GDP growth in 2021, which will benefit more to the profits and performance of small caps than to large companies. , in part due to their greater exposure to pent-up spending demand for services, they write.

Small businesses are also the biggest beneficiaries of Washington’s blue wave of fiscal stimulus, and have historically outperformed large caps in the middle of the business cycle, where BofA analysts believe we are now. They are more likely to benefit from increased investment spending and their valuations are more attractive than those of large caps, the analyst team wrote.

See: Here are ETFs to help you invest in the Biden infrastructure plan

Analysts recommend the Vanguard Small-Cap Growth ETF VBK,
+ 1.20%,
the Vanguard Small-Cap Value VBR ETF,
+ 0.17%
and the Vanguard Russell 2000 ETF VTWO,
+ 0.85%,
taking into account the fundamentals, technique and efficiency.

These funds have much leaner expense ratios of 0.07%, 0.07% and 0.10%, respectively, than many peers, as well as tighter spreads.

However, BofAs have a caveat when considering investing: Small caps have relinquished their leadership since the start of the year, and we also recognize that there may be additional risk in the short term, write. -they. Our work suggests that small caps outperformed large caps only ~ 40% of the time in April versus> 60% of the time in May and June.

Yet recently there has been an influx of money into small-cap ETFs, they write, across all major client groups, but led by retail which, according to our recent GWIM survey, is growing. more optimistic about the size segment, both medium and long. -term. Meanwhile, active funds are still significantly underweight small caps: small caps have reduced the share of multi-cap funds and active large cap managers are underweight smaller stocks relative to mega caps. overweighted.

The graph above, taken from the BofA research note, shows that approximately $ 35 billion has been invested in small-cap funds, which include ETFs and mutual funds. That’s overshadowed by the roughly $ 100 billion in exits since 2013, when small caps entered their age-old cycle of underperformance.

Lily: Goldilocks Fund? Midcap ETFs may be about to have their moment

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