Top Picks 2018: iShares Russell 2000 ETF (IWM)

01/08/2018 5:00 am EST

Focus: ETFS

Matthew Kerkhoff

Chief Investment Strategist, Model Investing

The U.S. economy recently experienced two quarters of 3% GDP growth for the first time since 2014. Our labor market remains strong, with more jobs being created each month than needed to sustain full employment, asserts Matt Kerkhoff, editor of Dow Theory Letters.

In addition, nearly all leading economic indicators are pointing upward, suggesting overall conditions are improving, rather than deteriorating.

This underlying strength is likely to carry through 2018, providing a tailwind for domestically focused small-cap companies who receive the vast majority of their revenues from within the U.S. In addition, small-cap firms tend to pay the highest effective tax rate, making them prime beneficiaries of the recent tax cuts.

Larger companies, such as those in the S&P 500, tend to be more international in nature and derive roughly half their revenues from overseas. As a result, they pay a lower effective tax rate than companies who operate solely within the U.S., and will benefit less from the recently reduced corporate tax rate.

According to some estimates, the move to a 21% corporate tax rate will result in small, domestically oriented companies seeing an increase in free cash flow between 15-20%. Should this materialize, it will provide ample resources for these smaller companies to invest, grow, and possibly return capital to shareholders.

This, combined with the positive economic backdrop, makes small-caps an ideal segment of the market to be invested in during 2018.

The iShares Russell 2000 ETF (IWM) provides diversified exposure to all sectors of the small-cap market. It has a low expense ratio and is an ideal way for investors to access the small-cap market.

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