As the Federal Reserve turned its eye from inflation to protecting the labor market at August’s Jackson Hole meeting, markets rose in hopes of rate cuts beginning at the end of the third quarter. A falling rate environment may prove particularly supportive for small-cap stocks.
“We do not seek or welcome further cooling in labor market conditions,” Federal Reserve Chair Jerome Powell said in a speech made at Jackson Hole in August, reported by WSJ. “The time has come for policy to adjust.”
This policy adjustment follows one of the most aggressive rate-hiking regimes enacted by the central bank in the last century. It took a heavy toll on small-cap companies in particular. According to Y-charts data, the Russell 2000 Index declined as much as 28% (10/27/23) on a price return basis in the period starting 3/01/2021 (the month interest rate cuts began).
Small companies often have higher interest rate sensitivity than larger market-cap peers. These companies generally rely more on borrowing from the capital markets. In a rising rate environment, borrowing at persistently higher costs may impact margins and growth potential.
However, in a declining rate environment, these companies often benefit earlier than large-cap companies. Small-cap stocks may prove an attractive investment as interest rate cuts get underway.
3 Ways to Invest in Small-Cap Stocks With Fidelity ETFs
The Fidelity Enhanced Small Cap ETF (FESM) is actively managed and invests primarily in companies within the Russell 2000 Index. The fund uses a research-driven approach, identifying long-term drivers of stock returns. These include growth, valuation, quality, momentum, and nontraditional factors and are used to evaluate a broad opportunity set of securities. This factor diversification helps potentially provide a fuller picture of a security’s return potential. FESM has an expense ratio of 0.28%.
The Fidelity Small-Mid Multifactor ETF (FSMD) provides exposure to U.S. small and midcap companies that score highly on four factors. These include quality, value, momentum, and low volatility.
The fund seeks to track the Fidelity Small-Mid Multifactor Index℠. The Index selects stocks from the top 3,000 U.S. companies minus the top 500 based on float-adjusted market capitalization. Securities included demonstrate high-quality, attractive valuations, lower volatility, and positive momentum signals compared to the broad market. The sector weights adjust to neutral at each Index rebalance. FSMD has an expense ratio of 0.15%.
The Fidelity Fundamental Small-Mid Cap ETF (FFSM) is actively managed and semitransparent and seeks long-term capital growth. The fund invests primarily in stocks within small and midcap segments, similar to those within the Russell 2500 IndexTM. The fund invests in growth, value, or both when investing. It uses fundamental factors as well as quantitative analysis to assess the industry position and financial health of individual companies. It also considers market and economic conditions. FFSM has an expense ratio of 0.43%.
Fidelity Investments® is an independent company, unaffiliated with VettaFi. There is no form of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the information herein. VettaFi LLC is the author and owner of these articles.
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