3 Reasons to Consider Small-Caps Now | ETF Trends

2024 has presented many investors with a waiting game. Whether it’s waiting for the Fed, waiting for inflation, or waiting for the election, lots of investors may be holding off on making important moves. One option that may invite action right now, however, is small-caps. Small-caps combine a few important benefits and are poised to benefit from some macroeconomic trends on the horizon. So why choose small-caps?

See more: Where Are Asset Managers Taking on Credit Risk?

Small-Caps Present Some Notable Upside

First, small-cap firms present some appealing upside. While large-cap firms can provide a bit more reliability given their size, they’re already done their growing. Small-cap firms aim to join that cohort, of course, and can present some serious growth opportunities.

For example, Textron Inc. (TXT) offers an attractive 14.1 forward P/E ratio, 12% quarterly year-over-year growth in diluted earnings per share, and has outperformed the S&P 500 Total Return index over the last year, per YCharts. The aircraft manufacturer’s stock price has risen 74.3% over the last five years.


TXT has done well over the last year vs. the SP 500 Total Return Index.

Rate Outlook Is Positive

Yes, even though we’re back to a “higher for longer” regime, the rate outlook is still positive for small-caps.

Why? Well, those much-discussed rate cuts that did not materialize this year could do so late this year and early next. Rate cuts would benefit small-caps significantly given how much debt small-caps often take on to grow. Small-cap tech firms especially would benefit from cheaper debt costs and easier borrowing.

Active, Fundamental Research Can Help Find Great Small Firms

Amid a boom in active investing, investors can find a series of strategies that lean on active, fundamental research to seek out small firms. For example, strategies like the Avantis U.S. Small Cap Value ETF (AVUV) and the Avantis U.S. Small Cap Equity ETF (AVSC) could appeal.

AVUV looks for small-cap firms with an active, value view, charging 25 basis points. It has returned 23.3% over one year, per Avantis Investors data. AVSC looks across all small-cap types and has returned 15.7% in that time. Taken together, small-cap stocks can present an intriguing opportunity right now with appealing trends, available via active strategies that can adapt and look for outperformance.

For more news, information, and analysis, visit the Core Strategies Channel.