Growth securities outperformed value securities in the first half of the year and are yet to slow down. Such momentum was primarily a result of big tech momentum and rallying within companies like Apple (AAPL), Microsoft (MSFT), and NVIDIA (NVDA). This rallying stemmed mainly from artificial intelligence (AI) hype. Despite the general outperformance of growth assets, small-cap growth did significantly worse than large-cap growth, a trend I believe still has room to run. However, bullish momentum is still evident within small-cap growth, and I also don’t see a clear selling opportunity in the short to medium term. In the long term, I believe the SPDR® S&P 600 Small Cap Growth ETF (NYSEARCA:SLYG) has significant potential for relatively steady growth even during unforgiving economic conditions. Therefore, I rate this ETF a Buy.
Strategy and Holdings Analysis
SLYG tracks the S&P SmallCap 600 Growth Index and uses a representative sampling technique that weights companies based on market capitalization. Companies within this index are selected based on sales growth, earnings-to-price ratios, and propensity to outperform the broader market. Such companies must have a market capitalization of at least $850mm and trade at least 250,000 shares in each of the six months leading up to the evaluation date.
This ETF houses over 350 stocks, none of which account for more than 2% of the entire fund.
In addition to many of these companies’ general inability to deliver the same results as the giants held within the Schwab U.S. Large-Cap Growth ETF (SCHG), I believe SLYG’s highly dispersed holdings also deprive it of momentum. The Vanguard Small-Cap Growth Index Fund ETF Shares (VBK) and the iShares Core S&P Small-Cap ETF (IJR) are similar in the sense that they both hold over 600 stocks, each with minuscule representation. Alternatively, ETFs like SCHG are more top-heavy, which I believe plays to their stronger momentum.
SLYG is more sector diverse than its large-cap counterparts like SCHG, as much of large-cap growth is concentrated in technology.
This could provide investors with access to growth without overweighting technology, a sector that tends to bear the brunt of market downturn. As seen below, SLYG’s October lows were quite higher than that of SCHG.
Though this aspect mitigates concentration risk and could hedge market declines, investors might want to consider how this might cut into momentum.
SLYG has been on a short-term uptrend since a sharp decline in early February, but I still believe this ETF remains rangebound in the coming periods.
This ETF took approximately two months to break above the resistance created in early April. In early June, SLYG continued a steady uptrend and took half that time to break above this new resistance, which occurred in early July. In mid-July, SLYG incurred a new level of resistance at roughly 79, which it breached just a few days later.
The light blue line represents a short-term support level that this ETF has hovered above since mid-July. I think that the recent bearish momentum will push SLYG closer to 77, which this ETF emerged from at the beginning of last month. As of recently, SLYG’s bullish momentum has dwindled after deflecting from the new resistance just above 80, which also led this ETF to dip below the 50-day moving average for the third time in just over a month.
When looking at the Moving average convergence/divergence indicator (MACD), the MACD line has dipped below the signal line, indicating a bearish crossover. Additionally, both the MACD and signal lines breached below the zero line, which could signify the start of a general downtrend.
Though momentum appears to be turning bearish, the MACD and Signal lines did not breach the zero line with ample momentum. Furthermore, the Relative Strength Index (RSI) doesn’t illustrate strong buying or selling, more the reason why investors should not be particularly fazed by this short-term bearishness. I think this ETF could well continue a general uptrend going forward.
Going Forward (Macroeconomic Outlook)
Though the 2023 bull market persists and the Fear and Greed Index is still skewed right, investors might still want to consider what implications a market turnaround could bring for growth stocks.
The Fear and Greed Index has been inclining since the collapse of Silicon Valley Bank in March, despite the Fed’s persistent rate hikes and efforts to reduce spending. Though inflation is lowering, interest rates are still at the highest they’ve been in 22 years.
The Volatility Index (VIX) has also recently popped up at the same time that the fear and greed index took a momentary dip, which could precede a reversal in investor sentiment. Risk-aversion could be quite threatening to small-cap growth assets like SLYG. However, a reversal could also allow this ETF to hedge the macroeconomic shocks that are often absorbed by big tech companies held in ETFs like SCHG and PBW.
The momentum within SLYG has dwindled recently while this ETF has also generally been left behind the rest of the market so far this year. However, SLYG still maintains a sluggish uptrend. Compared to its large-cap alternatives, this ETF could potentially hedge some of the procyclicality associated with big tech. For these reasons, I rate SLYG a Buy.