Small-cap stocks are stealing the spotlight as we close out 2024, riding high on a perfect storm of political and economic tailwinds. Donald Trump's re-election has sent ripples through the market, with his pro-business agenda sparking a rally that's lifting small companies to new heights. 

The Russell 2000 Index (RUT), a key barometer for small-caps, broke out to a new three-year peak following Trump's victory, as investors priced in the president-elect's promises of reduced corporate taxes, favorable tariffs, and deregulation, which are expected to particularly benefit domestically focused small-caps. As we look ahead, many analysts predict these nimble players could continue to outperform, potentially leading the charge into 2025.

Adding fuel to the fire, the Federal Reserve's recent 0.25 percentage point rate cut has further boosted small-cap appeal. This marks the second reduction of 2024, bringing the federal funds rate down to 4.5%-4.75%. With inflation and borrowing costs both easing, small businesses are finding themselves in a sweet spot.

For investors looking to capitalize on this small-cap momentum, let's explore three distinct ETFs that offer a unique approach to playing this dynamic market segment.

#1. Vanguard Small-Cap Growth ETF

The Vanguard Small-Cap Growth ETF (VBK) has been a standout performer in 2024, capturing the power of small-cap growth potential. Since its inception in January 2004, VBK has grown into a formidable player in the small-cap arena, now boasting an impressive $19.72 billion in assets under management (AUM).

VBK's strategy is both straightforward and sophisticated. It tracks the CRSP US Small Cap Growth Index, employing a full-replication approach to mirror the index's composition. This method ensures the fund captures the entire spectrum of small-cap growth opportunities in the U.S. market. 

VBK's portfolio construction focuses on companies demonstrating robust growth characteristics, including strong earnings growth, accelerating sales, high return on assets, and promising investment metrics. This multi-faceted approach allows VBK to identify and invest in small companies with the most significant growth potential across various sectors.

The fund's performance speaks volumes about its strategy's effectiveness. Over the past 52 weeks, VBK is up 35.3%, and the shares have racked up a 20% gain so far in 2024 - outpacing the RUT on both counts.

VBK's top holdings showcase its diverse yet focused approach. Midstream energy stock Targa Resources (TRGP) leads at 1.27%, followed by Taser company Axon Enterprise Inc (AXON) at 1.02%, footwear firm Deckers Outdoor (DECK) at 0.95%, software company PTC Inc (PTC) at 0.80%, and HVAC specialist Lennox International (LII) at 0.74%. These companies exemplify the growth characteristics VBK targets, contributing to its robust performance.

Despite its strong returns, VBK remains cost-effective, with a mere 0.07% management fee. It also offers a modest annualized dividend of $1.72 per share, yielding 0.59%—a bonus for a growth-oriented fund. The ETF's popularity is evident in its trading volume, which averages around 300,000 shares, ensuring ample liquidity for traders.

#2. Invesco DWA SmallCap Momentum ETF

The Invesco DWA SmallCap Momentum ETF (DWAS) has been on a tear, showcasing the power of momentum investing in the small-cap space. Since its inception in July 2012, DWAS has carved out a unique niche, focusing on small-cap companies exhibiting strong relative strength characteristics.

At the heart of DWAS's strategy is the Dorsey Wright SmallCap Technical Leaders Index. This isn't your run-of-the-mill index tracking. The fund employs a sophisticated, proprietary methodology developed by Dorsey, Wright & Associates, LLC to identify small-caps with potent market momentum. By allocating at least 90% of its assets to these high-flyers, DWAS aims to capture outsized returns in the dynamic small-cap sector.

This approach has paid off handsomely. DWAS has delivered a standout 33% return over the past 52 weeks, and has gained nearly 19% so far in 2024.

Diving into the portfolio, we find a diverse mix of momentum leaders. Quantum computing startup Rigel Pharmaceuticals (RIGL) tops the list at 2.14%, followed by defense firm Leonardo DRS Inc (DRS) at 1.79%, industrial name Limbach Holdings (LMB) at 1.64%, construction company Sterling Infrastructure (STRL) at 1.57%, and auto parts specialist Modine Manufacturing (MOD) at 1.55%. These holdings reflect the fund's knack for identifying small caps with significant growth potential across various sectors.

With $1.07 billion in assets under management, DWAS has grown into a substantial player in the small-cap ETF space. With average volumes hovering around 34,000 shares, however, it's not quite as active as VBK on a daily basis, so investors should watch entry prices carefully to control slippage.

DWAS does come with a higher management fee of 0.60%, reflecting the more active nature of its strategy. It also offers a respectable annualized dividend of $1.48 per share, yielding 1.50% - a nice bonus for a momentum-focused fund.

The recent performance of DWAS underscores the potential of its momentum-driven approach. With a 6.4% gain in the past month alone, it's clear that this ETF is capitalizing on the current market dynamics favoring small-cap stocks. 

#3. ProShares Ultra Russell 2000 ETF

The ProShares Ultra Russell 2000 (UWM) is not your average small-cap ETF. Launched in January 2007, this fund takes a bold approach to small-cap investing, aiming to deliver twice the daily performance of the Russell 2000 Index. It's a high-octane play that's best suited for investors with an appetite for leveraged investments, and a higher tolerance for risk.

UWM's strategy is straightforward but potent. Through a combination of swap agreements with major financial institutions and direct investments in Russell 2000 components, the fund seeks to achieve its 2x leverage. This approach has led to some solid returns when the RUT is performing well, with UWM surging 57.4% over the past 52 weeks, and rising 23.3% in 2024 alone.

However, this amplified exposure comes with heightened volatility, and it's important to note that the fund is designed to 2x RUT's returns on a daily basis, and not over longer time frames. UWM's daily trading volumes are hovering around 650,000 shares, and this liquidity is crucial for a fund designed for active trading rather than long-term holding.

With $516 million in AUM, UWM has carved out a significant niche in the leveraged ETF space. The fund's management fee of 0.95% is higher than traditional ETFs, reflecting the complexity of maintaining its leveraged position. Despite its aggressive growth focus, UWM still manages to offer a dividend yield of 0.90%, with an annualized dividend of $0.42 per share.

It's worth noting that UWM doesn't disclose individual stock holdings like traditional ETFs. Instead, its performance is tied directly to the Russell 2000 Index, providing broad exposure to the small-cap market.

UWM's approach is not for the faint of heart. Its leveraged nature means both gains and losses are amplified. 

Conclusion

Small-cap stocks are having a moment, and these three ETFs—VBK, DWAS, and UWM—each offer unique ways to tap into their growth potential. Whether you're looking for steady growth with VBK, momentum-driven gains with DWAS, or amplified returns through UWM’s leveraged strategy, there's something here for every risk appetite. As the market outlook continues to shift amid changing policy expectations, these funds provide diverse approaches to capturing the opportunities small-cap stocks present in 2024 and beyond.

On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.