Many believe smaller companies could struggle if the Federal Reserve begins hiking interest rates. However, small-cap stocks and category-related exchange traded funds may outperform ahead.
Small-cap skeptics point to a number of factors that may weigh on the asset category. For instance, some point out that small companies rely on bank loans for financing, including those with adjustable-rates, which would cost more to service as rates rise, reports John Waggoner for InvestmentNews.
Additionally, naysayers may argue that investors may treat small-cap growth companies like a bond with no maturity, making the low-dividend-paying category less appealing as rates rise.
SEE MORE: These ETF Options Buck Success in Small-Cap Space
However, the equities market has been aware of an impending Federal Reserve rate hike and more or less priced the action in. Furthermore, Sam Stovall, U.S. equity strategist for S&P Global Market Intelligence, pointed out that small-cap stocks have held up better than large-caps in the wake of Fed Chairwoman Janet Yellen’s speech.
[related_stories]“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.