It could be time for small caps to take the lead, and several exchange traded funds provide smart exposure to that part of the market, according to Bank of America. ETF strategist Jared Woodard said in a note to clients on Monday that the macroeconomic environment, plus early earnings season trends, point to a period of outperformance for small-caps. “Small-caps are seeing much better earnings guidance, have held up better in inflationary/stagflationary backdrops and benefit from still better trends in services > goods spending,” the note said. The small-cap Russell 2000 index has fallen about 19% this year, slightly underperforming the S & P 500 and the Russell 1000. If small caps start to close the gap, it could be value stocks that lead the way, Woodard said. “Value has tended to outperform Growth within small-caps during recessions (and over the long-term), and [strategist] Jill Hall currently favors Value factors such as free cash flow,” the Bank of America note said. Bank of America upgraded one value-focused fund to buy from hold on Monday. The Pacer Small-Cap Cash Cows 100 ETF (CALF) is now the top rated small-cap fund for Bank of America. It has a four-star rating from Morningstar, and a 0.59% expense ratio. The Pacer fund contains the stocks with the highest free cash flow in the S & P 600, with top holdings including VIR Biotechnology , Academy Sports & Outdoors and Korn Ferry . The fund is down about 14% for the year. Source: Bank of America Bank of America has two other small-cap funds with buy ratings, and they are Vanguard’s funds for small-cap value (VBR) and small-cap growth (VBK) . Like most Vanguard funds, the small-cap vehicles have the benefit of low fees. Both funds have an expense ratio of just 0.07%. — CNBC’s Michael Bloom contributed to this report.
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