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.
Related: ETFs In 2016: Large Cap vs. Small Cap
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.
[related_stories]“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.
Related: An Unexpected Strength Of Small Cap ETFs
The lower reliance on multinational sales has also supported mid-caps. Additionally, the mid-cap segment has provided favorable acquisition targets when cash-heavy large-cap companies are shopping around.
Other strong small-cap performers include the PowerShares Russell 2000 Equal Weight Portfolio (NYSEArca: EQWS) and the Schwab U.S. Small-Cap ETF (NYSEArca: SCHA).
“Keep in mind that smaller companies generally carry higher risk than larger, more stable companies. But small-caps also confer more room for growth and they actually provide ballast amid today’s international volatility,” adds TheStreet.com “IJR boasts year-to-date and one-year returns of 5.53% and 0.39%, respectively, which is impressive compared with the iShares Russell 2000 (2.43% and -5.82%, respectively) and the S&P 500 (3.46% and 1.52%, respectively) over the same period.
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iShares Core S&P Small-Cap ETF
