Last week, the Commerce Department said U.S. GDP jumped 4.1% in the second quarter, good for the best GDP growth number since the third quarter of 2014. As has been widely documented, small-cap stocks and the related ETFs are benefiting from robust U.S. economic growth.
At the sector level, that includes financial services stocks and ETFs such as the Invesco S&P SmallCap Financials Portfolio (NASDAQ: PSCF).
“On average for every 1% of GDP growth, the S&P SmallCap 600 has risen 5.2%, while S&P MidCap 400 and S&P 500 have risen a respective 4.9% and 4.0%. Within small caps, the financials, health care and energy sectors have risen most with growth, gaining on average 6.9%, 6.4% and 6.3%, respectively for every 1% of GDP growth,” according to S&P Dow Jones Indices.
PSCF tracks the S&P SmallCap 600 Capped Financials & Real Estate Index, an offshoot of the widely followed S&P SmallCap 600 Index. PSCF is up nearly 7% year-to-date, putting it well ahead of comparable large-cap financial services ETFs.
More On PSCF’s GDP Benefits
PSCF’s 130 holdings “are principally engaged in the business of providing services and products, including banking, investment services, insurance and real estate finance services,” according to Invesco.
The average market capitalization of PSCF’s holdings is $1.96 billion, putting the fund at the higher end of small-cap territory.
While it’s still early, the warnings about currency risk, notably a stronger greenback, indicates multinational firms could face an increasingly tough period ahead. S&P 500 companies previously generated one of their strongest quarterly earnings, partly due to a depreciating U.S. dollar – the weaker dollar benefits large-cap U.S. multinationals by making exports cheaper to foreign buyers and also causing overseas profits to look bigger when converted back into USD.
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U.S. small-cap stocks have also enjoyed a strong performance relative to other global equities, especially with the U.S. dollar strengthening against foreign currencies. Small-cap financials typically generate significant portions of their revenue on a domestic basis.
“Although in small caps, financials have delivered 50 basis points more of return than health care from each 1% of GDP growth on average, the financial small cap premium is by far the most sensitive to GDP growth. For every 1% of GDP growth on average, small cap financials have returned 2.4% more than large cap financials,” notes S&P Dow Jones.
For more information on the banking sector, visit our financial category.