The emergence of the Omicron variant of the coronavirus and fears of multiple interest rate hikes by the Federal Reserve are crimping small-cap stocks and exchange traded funds.
Small-cap growth is taking the brunt of the punishment. Over the past month, the Russell 2000 Growth Index is lower by almost 12%, while the Russell 2000 Index is off 10% over the same period. That could also signal that buying opportunities are afoot with ETFs such as the Invesco S&P Smallcap 600Pure Growth ETF (NYSEArca: RZG).
Over the past month, RZG is beating both the Russell 2000 and the Russell 2000 Growth indexes. RZG tracks the S&P SmallCap 600® Pure Growth Index.
“The Index measures the performance of securities that exhibit strong growth characteristics in the S&P SmallCap 600® Index. Growth is measured by the following risk factors: sales growth, earnings change to price and momentum,” according to Invesco.
RZG’s deep growth approach coupled with the fact that it’s been less bad than the aforementioned benchmarks could be signals that small-cap growth could be worth revisiting in 2022.
The recent weakness “in these stocks has partially been driven by the Federal Reserve’s plan to end its bond-buying program soon. Wiping out the Fed’s $80 billion in monthly long-dated bond purchases could pressure bond prices and lift their yields. That dents the valuations of companies expecting the bulk of their profits to come many years down the line,” reports Jacob Sonenshine for Barron’s.
Small-caps usually command premiums relative to large-cap equities, and that’s particularly true with small-cap growth, which is to say that factor combination is rarely discounted. However, it is today, relative to historical standards.
The Russell 2000 Growth Index sports an “aggregate price to forward earnings multiple of 43.3 times is significantly lower than its Nov. 8 level of 51.9 times, according to FactSet. The multiple is also back around levels seen just before the start of the pandemic, when bond yields were higher—suggesting these stocks may already be pricing in the potential for a rise in bond yields,” reports Barron’s.
Home to 125 stocks, RZG devotes 23.65% of its weight to financial services stocks, while consumer discretionary and financial services names combine for over 34% of the fund’s weight. Technology and industrial equities combine for a quarter of the RZG roster.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.