Small-Caps Could Shine in 2022 — Take a Balanced Approach With EWS

Expectations are in place for small-cap strength in 2022. That’s the good news, but with market observes forecasting that the economic outlook will be supportive of smaller stocks in the new year, it’s vital that investors consider a variety of options for small-cap access.

Among small-cap exchange traded funds, the Invesco S&P SmallCap 600 Equal Weight ETF (EWSC) is a hidden gem, and it could exhibit leadership in 2022, assuming that bullish prognostications for smaller equities prove accurate.

“Jefferies’ small-cap strategist Steven DeSanctis expects gross domestic product to rise more than 4% next year and interest rates to increase. As a result, the Russell 2000 will gain roughly 9% in the next year, reaching the 2,350 level, he expects,” reports Maggie Fitzgerald for CNBC.

In a recent note to clients, DeSanctis expresses a preference for cyclical value stocks. As is the case with large-cap equal-weight ETFs, EWSC answers the value call. The Invesco fund allocates approximately 49% of its weight to the financial services, industrial, and consumer discretionary sectors, according to issuer data.

Jefferies has “overweight” ratings on the financial services, healthcare, industrial, and materials sectors. That quartet combines for about 53% of EWSC’s weight.

Adding to the allure of the small-cap trade in 2022 is earnings momentum — a positive trait, considering that many smaller companies struggle to attain profitability.

“We feel that [small cap] earnings growth will be strong, up 17.5%, and stocks follow earnings. Earnings will be strong due to an economy that should grow above 4%,” said DeSanctis.

Something else to consider with regards to the EWSC 2022 outlook: The ETF is already a leader. The equal-weight small-cap ETF is up 31.8% year-to-date. That’s a better than two-to-one advantage over the Russell 2000 Index, and EWSC is also handily beating the S&P SmallCap 600 Index. Impressively, EWSC’s annualized volatility is comparable to what’s found on those two widely followed benchmarks.

EWSC’s 2021 strength isn’t a one-off event, either. The equal-weight small-cap fund is beating the Russell 2000 and the S&P SmallCap 600 indexes by an average of almost 6% over the past three years.

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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.