Despite global growth worries and the strength in the greenback, U.S. economic growth continued to climb steadily buoyed by recovering housing fundamentals, a healing job market and increasing consumer confidence. Though the growth rate in Q4 of 2014 fell shy of the impressive pace recorded in Q2 and Q3, the rate is still among the best in the developed market pack.
Investors should note that the major share of the domestic stock market rally this year can be attributed to small and mid caps as their larger counterparts were hard hit by a firm dollar and weaker exports (read: 3 Currency ETFs that Crumbled in Q1).
In such a situation, the Fed came up with a caution stance on domestic growth in its March meeting. The central bank also lowered the U.S. economic growth projection (considering the central tendency method) for 2015 from 2.6−3% (guided in December) to 2.3−2.7%. The growth projections for 2016 and 2017 were also cut to 2.3−2.7% and 2.0−2.4%, respectively, from 2.5−3% and 2.3−2.5% (read: ETF Winners and a Loser Post Fed Meeting).
If this was not enough, the U.S. economy also came up with wavering data points including the lower-than-expected ADP job reading. U.S. factory activity touched an almost two-year low with the index sliding to 51.5 in March from 52.9 in February. Per Reuters, GDP estimates for Q1 range from 0.8% to 1.2%, at the current level. In fact, analysts foresee ‘the worst earnings season in six years’ round the corner.
Such downbeat data appear to be seasonal as the U.S. was under snow coverage in Q1 which locked people indoors, refraining them from economic activity. Still, cautious investors may want to reshuffle their portfolio and look for ETFs suitable for the economic backdrop in Q2.
Why Mid Cap Growth?
Given the recent bout of volatility, we believe that a middle-of-the path approach would be an appropriate stance for Q2. This segment is neither overtly alert nor explicitly brave. Overall, situations are not favorable either for small cap growth ETFs due to the ongoing ‘moderation’ in the U.S. economy, or for the large caps due to the still sagging global economy and the potential strength in the U.S. dollar once the Fed tightens its policy.
This makes mid cap growth ETFs more intriguing as these offer the best of both worlds and get mileage out of a better U.S. growth rate among developed countries. We have found a number of ETFs that have a top Zacks ETF Rank in the mid cap growth space and are thus expected to outperform in Q2. These ETFs easily crushed the broader market in the last one month.
