“Maybe the ‘great rotation’ pertains less to stocks versus bonds than it does between large- and small-cap equities,” Stovall said in a note.
A Fed rate hike would also help support the U.S. dollar, which would make U.S. exports more expensive overseas and diminish revenue for larger companies with a bigger international footprint. In contrast, small-cap stocks are focused on domestic markets, and Stovall noted that growth projections for U.S. small-caps are better than those for large-cap stocks.
SEE MORE: Treading Carefully With Small-Cap ETFs
“In the past 36 months, the S&P 500 has recorded a 0.72 monthly correlation with the U.S. Dollar Index (DXY) versus a correlation of 0.55 for the S&P SmallCap 600,” Stovall added.
Investors interested in the small-cap category have a number of broad ETF options available, including:
- iShares Russell 2000 ETF (NYSEArca: IWM)
- iShares Core S&P Small-Cap ETF (NYSEArca: IJR)
- Vanguard Small Cap ETF (NYSEArca: VB)
- Schwab U.S. Small-Cap ETF (NYSEArca: SCHA)
- WisdomTree SmallCap Dividend Fund (NYSEArca: DES)
- Schwab Fundamental U.S. Small Company ETF (NYSEArca: FNDA)
- Vanguard Russell 2000 ETF (NYSEArca: VTWO)
- SPDR S&P 600 Small Cap ETF (NYSEArca: SLY)
- First Trust Small Cap Core AlphaDEX Fund (Nasdaq: FYX)
- PowerShares S&P SmallCap Low Volatility Portfolio (NYSEArca: XSLV)
- WisdomTree SmallCap Earnings Fund (NYSEArca: EES)
- Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ)
- Vanguard S&P Small-Cap 600 ETF (NYSEArca: VIOO)
- iShares Morningstar Small-Cap ETF (NYSEArca: JKJ)
- PowerShares DWA SmallCap Momentum Portfolio (NYSEArca: DWAS)
- Guggenheim S&P SmallCap 600 Equal Weight ETF (NYSEArca: EWSC)
- SPDR Russell 2000 ETF (NYSEArca: TWOK)
- SPDR Russell 2000 Low Volatility ETF (NYSEArca: SMLV)
- WisdomTree U.S. SmallCap Dividend Growth Fund (NasdaqGM: DGRS)
- Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted Index ETF (NasdaqGM: CSF)
- iShares Enhanced U.S. Small-Cap ETF (NYSEArca: IESM)
- AlphaMark Actively Managed Small Cap ETF (NasdaqGM: SMCP)
- Compass EMP US Small Cap High Dividend 100 Volatility Weighted Index ETF (NasdaqGM: CSB)
- PowerShares Russell 2000 Equal Weight Portfolio (NYSEArca: EQWS)
- Compass EMP US Small Cap 500 Volatility Weighted Index ETF (NasdaqGM: CSA)
- iShares FactorSelect MSCI USA Small-Cap ETF (NYSEArca: SMLF)
- ProShares Russell 2000 Dividend Growers ETF (NYSEArca: SMDV)
- ETFS Zacks Earnings Small-Cap U.S. Index Fund (NYSEArca: ZSML)
- Janus Small Cap Growth Alpha ETF (NasdaqGM: JSML)
- AdvisorShares Cornerstone Small Cap ETF (NYSEArca: SCAP)
For more information on the small capitalization market, visit our small-cap category.
CORRECTION: Updated small-cap ETF list.