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Goldman Predicts 14% Growth for Small Cap Stocks in the Next 12 Months: ETFs to Capture the Potential Returns

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The Surprisingly Resilient US Economy Presents an Opportunity for Cheap Small-Cap Stocks

Potential Catch-Up Rally for Small-Cap Stocks

Goldman Sachs suggests that the U.S. economy's resilience may lead to a catch-up rally for cheap small-cap stocks. According to portfolio strategist Lily Calcagnini, Goldman's models indicate that the Russell 2000 small-cap index is poised to outperform over the next 12 months. Based on a simple model considering U.S. economic growth and starting valuations, the Russell 2000 is projected to rise by 14%. This potential return represents a 5% outperformance compared to Goldman's forecast for the S&P 500.

Higher Returns with More Risk

While the Russell 2000 offers the potential for higher returns, it also comes with increased risk. Goldman Sachs economists are more optimistic than the Wall Street consensus, and historically, small-cap stocks have been sensitive to economic conditions. To gain exposure to the broad universe of small-cap stocks, investors have the option to invest in exchange-traded funds (ETFs).

Investing in Small-Cap Stocks with ETFs

Several ETFs available in the market allow investors to access the small-cap space. The iShares Core S&P Small-Cap ETF (IJR) is the largest small-cap ETF, with over $67 billion in assets and an expense ratio of 0.06%. This ETF tracks the S&P Small-Cap 600 index. BlackRock also offers the iShares Russell 2000 ETF (IWM), which has over $50 billion in assets and an expense ratio of 0.19%. Vanguard provides the Vanguard Small-Cap ETF (VB), which tracks the CRSP US Small Cap Index, has over $40 billion in assets, and boasts a lower expense ratio of 0.05%. Additionally, Vanguard has the Russell 2000 ETF (VTWO) with an expense ratio of 0.10% and approximately $11 billion in assets. Another option is the Schwab U.S. Small-Cap ETF (SCHA), which tracks a Dow Jones index, has $13.7 billion in assets, and an expense ratio of 0.04%.

Different Performance Among Small Cap ETFs

While the broad index funds mentioned above have returned less than 10% this year, some active funds have achieved better results. The Janus Henderson Small Cap Growth Alpha ETF (JSML) has been the best-performing U.S. small-cap ETF this year, with a total return of 21.9%. This $135 million fund follows a custom index and has an expense ratio of 0.30%. For investors looking to diversify from growth strategies, the Pacer US Small Cap Cash Cows 100 ETF (CALF) has delivered a total return of 11.2%, outperforming index funds. With over $2 billion in assets and an expense ratio of 0.59%, CALF offers an alternative investment opportunity.

In conclusion, with a resilient U.S. economy, investors may find potential in cheap small-cap stocks. Goldman Sachs' models suggest a catch-up rally for the Russell 2000 small-cap index, but investors should be aware that higher returns come with increased risk. By utilizing ETFs, investors can gain exposure to the small-cap space, with options available from popular providers such as iShares, Vanguard, and Schwab. While broad index funds have seen modest returns, some active funds have performed better this year. The Janus Henderson Small Cap Growth Alpha ETF stands out as the top-performing small-cap ETF, while the Pacer US Small Cap Cash Cows 100 ETF provides an attractive alternative for investors seeking diversification.

Implications for a New Business

The current market conditions and the potential catch-up rally for small-cap stocks present an interesting opportunity for new businesses. It is important for entrepreneurs and startups to understand how this trend can impact their business strategies and investment decisions.

Potential Funding Options

Raising capital is crucial for any new business, and the resilience of the U.S. economy can work in favor of startups seeking funding. With the potential outperformance of small-cap stocks, investors may be more inclined to invest in new and promising businesses. Entrepreneurs can tap into this renewed interest by targeting investors who are specifically looking for small-cap opportunities. Pitching their business as a growth-oriented, small-cap investment may help attract potential investors who are seeking higher returns.

Increased Competition

As more investors turn their attention to small-cap stocks, the competition for funding can become more intense. Startups should be prepared for a potentially crowded marketplace, as they vie for attention and investment in this space. To stand out from the competition, entrepreneurs should focus on building a strong business case, demonstrating clear growth potential, and showcasing their unique value proposition to investors.

Exploring ETF Options

For entrepreneurs who are considering investing their own capital in the market, ETFs can provide a convenient way to gain exposure to small-cap stocks. Exploring ETF options like the iShares Core S&P Small-Cap ETF, Vanguard Small-Cap ETF, or Schwab U.S. Small-Cap ETF can allow entrepreneurs to diversify their investment portfolios and potentially benefit from the expected rally in small-cap stocks.

Market Sensitivity

It's crucial to recognize that small-cap stocks can be more sensitive to economic conditions. As new businesses are starting out and may not have established revenue streams or a strong track record, they may be more susceptible to market fluctuations. Entrepreneurs should carefully evaluate their risk tolerance and consider diversifying their investments to mitigate potential losses.

The current resilience of the U.S. economy presents an opportunity for new businesses to leverage the potential catch-up rally in small-cap stocks. Entrepreneurs can explore funding options and attract investors who are interested in small-cap opportunities. However, they should be prepared for increased competition and consider the market sensitivity of small-cap stocks. By understanding these dynamics, new businesses can position themselves strategically and make informed investment decisions to support their growth and success.

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