While U.S. markets stumbled over the past month, small-capitalization stock exchange traded funds have outperformed, and more investors are taking notice.

Over the past month, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) rose 1.4%, Vanguard Small Cap ETF (NYSEArca: VB) was up 0.8% and iShares Russell 2000 ETF (NYSEArca: IWM) gained 1.7%. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) declined 0.6%. [Small-Cap ETFs: Look Beyond the Russell 2000]

The strength in small-cap stock ETFs was accompanied by heavy inflows into the asset category. Over the past month, IWM attracted $3.2 billion in net inflows, VB brought in $197.0 million and IJR added $118.0 million, according to ETF.com. In contrast, SPY saw $867.6 million in outflows.

Fueling the outperformance in small-cap stocks, a jump in small healthcare and technology companies led the May rebound, Financial Times reports.

The small-cap ETFs with the largest weights in the two sectors exhibited the best gains over the past month. For instance, IWM includes a 18.2% tilt toward tech and 16.2% position in healthcare. IJR holds 16.6% tech and 13.0% healthcare. VB has 14.9% in technology and 10.7% in healthcare.

Smaller companies are a play on the domestic economy. While previous economic reports have been less than appealing, economists expect the gross domestic product to accelerate in the second half of the year. [Mid-, Small-Cap ETFs to Focus on U.S. Growth]

“Our analysts expect the US economy to rebound in the second half, and if it does then small caps’ higher leverage and capital expenditure should drive earnings higher and bolster their extended valuations,” Barclays strategists said in the article.

The improved economic conditions should also buoy small-caps and support their higher valuations. IWM is trading at a 20.96 price-to-earnings ratio, IJR has a 21.41 P/E and VB shows a 20.6 P/E.

“We need the US economy to rebound in the second half of year so small-cap sales and earnings growth remains strong and tops the large caps,” Steven DeSanctis, a small-cap strategist with Bank of America Merrill Lynch, said in the article. “With all of the big cuts in estimated growth, second half estimates could be easy to hurdle over.”

iShares Russell 2000 ETF

For more information on small-capitalization stocks, visit our small-cap category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own shares of IWM and SPY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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