Large-cap companies have been basking in the sun of an equities rally for much of 2023. But it could be small-caps’ turn. Options traders are already sensing opportunity in a potential small-cap rally as 2023 winds down and 2024 gets underway.
The direction of options traders can give an indication of what speculators think the market may do. With a recent rate pause and the potential of a looser monetary policy on the horizon, options traders are skewing their bets toward small caps.
“Options traders piled into bullish bets on the Russell 2000 on Tuesday (November 14), after the October consumer-price-index report sent the battered small-cap index surging to its best day in more than a year,” MarketWatch noted. “A team of options strategists at Goldman Sachs Group said that 1.44 million call options tied to an exchange-traded fund tracking the Russell 2000 RUT changed hands as small caps rocketed higher and traders chased gains.”
As mentioned, the direction of interest rates by the Federal Reserve could open the floodgates to a small-cap rally. The prevailing sentiment, at least for now, is that 2024 should see the Fed ending its rate-hiking cycle.
“Many are betting that the index could continue to chug higher as traders anticipate that the Federal Reserve could start cutting interest rates as soon as March, according to Gene Goldman, chief investment officer at Cetera Investment Management,” the MarketWatch report added further. “This spurt of demand marked the highest daily turnover in small-cap call options ever recorded, according to data compiled by Goldman.”
An Active, Small-Cap Option
Active management can allow for adjustments to a portfolio on the fly. So investors who are hesitant when it comes to picking their own stocks can look to ETFs like the Avantis U.S. Small Cap Value ETF (AVUV). The fund seeks long-term capital appreciation. It invests primarily in a diverse group of U.S. small-cap companies across market sectors and industry groups.
Furthermore, this fund also features a low-cost solution, with a 0.25% expense ratio that can compete with passive funds that also focus on small-cap exposure. The active component still allows for AVUV to be pliable with the current market environment as well as when conditions change in the future.
In addition, the fund has a more discerning value screener that’s helpful in the current times where a lot of macroeconomic uncertainty still exists, especially regarding the direction of interest rates. But it’s still an ideal way to invest in the vast universe of small-cap companies while allowing for a value factor strategy to handpick holdings.
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