Cheap Small Cap & Sector ETFs Soar

Some of the most beaten-down areas of the market soared in November, closing the gap with their high-flying counterparts. Cheap stocks like small caps, energy, financials and industrials finally got the catalyst they were waiting for in the slew of positive vaccine data released during the month.

Three leading vaccine candidates showed promise, raising hopes that the COVID-19 pandemic can finally come to a close next year.

Small cap U.S. stocks, as measured by the iShares Russell 2000 ETF (IWM), surged 18.2% in November, handily outperforming the 10.9% gain in the iShares Core S&P 500 ETF (IVV) in the same period. That marks the best month ever for small caps.

Yet even after its ascent to all-time highs, the small cap fund is lagging behind its large cap counterpart for the year as a whole. IWM is up 10.5% year to date, compared to the 14.1% gain for IVV. The S&P 500’s strength has been fueled in large part by the enormous rallies in megacap tech stocks like Apple, Amazon and Microsoft, among others.

Those stocks, coveted throughout much of the year for their safety and consistency, took a breather in November, opening the door for small caps to play catch-up.

Closing The Gap …

From Worst To First

Other areas that played catch-up in November included beaten-down sectors like energy, financials and industrials.

The Energy Select Sector SPDR Fund (XLE) skyrocketed by 28% in November, its best month ever.  That said, a bit of context is important here. Even after November’s rally, the energy sector is still down 35.4% on a year-to-date basis, making it the worst-performing sector for 2020 as a whole.

The sector, which had been left for dead at the end of October, got a boost as investors reasoned that demand will pick up next year as the pandemic’s effects potentially ebb. West Texas Intermediate oil prices briefly topped $45 in November, the highest price in nearly nine months.

Financials Pare Their Losses

Just as energy, the worst-performing sector of 2020, turned out to be the best-performing sector in November, the financial sector was No. 2 on both those lists.

The Financial Select Sector SPDR Fund (XLF) jumped 16.8% in the month, good enough for its best monthly gain since the financial crisis. On a year-to-date basis though, financials are still down 7.5%, one of only three sectors still in the red.

Financials caught a bid during November on expectations that interest rates and the demand for loans could grow in 2021 on the back of a stronger economy.

Likewise, industrials, which rallied a record-setting 16% during November, were buoyed by similar expectations of a firmer economy. Also helping the sector was news that the U.S. Federal Aviation Administration had cleared Boeing’s 737 MAX to return to service. Boeing alone makes up 4.3% of the Industrial Select Sector SPDR Fund (XLI), and together with its suppliers, makes up an even bigger chunk of the ETF.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Strong Position

November is likely to end up being a pivotal month for U.S. stocks. The surge in IWM and XLI has taken small caps and industrials from year-to-date losses to solid gains. At the same time, even sectors like energy and financials have pared much of their losses.

With only one month left in the year, markets are in a strong position heading into what has historically been a positive period for equity returns.

Anything can happen (this is 2020 after all), but it would take steep losses in December to erase the gains that the broader gauges like the S&P 500 and the Russell 2000 have built up through the first 11 months of the year.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2