Small-cap stocks and the corresponding exchange traded funds are often viewed as volatile instruments, but some argue there could be opportunity with ETFs such as the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which follows the S&P SmallCap 600 Index, as markets move past the initial Brexit shock.
While investors have been favoring large caps and low volatility stocks for the bulk of this year, some important small-cap benchmarks have recently displayed notable technical strength, indicating risk appetite could creep back into the market in the coming weeks.
The small-cap segment has been gaining momentum in recent months, jumping on the risk-on sentiment after the Fed stated it would only hike interest rates two times later this year, or downwardly revised from the four hikes it expected back in December. The extended low-rate environment has also been a boon for smaller companies that have capitalized on cheap debt in their balance sheets.
“The key is to find smaller American companies that benefit from domestic economic growth but aren’t major exporters in the manufacturing sector. With limited exposure to Europe, these firms will thrive this year as U.S. interest rates remain low and the economic recovery stays on track,” according to TheStreet.com.
Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.