ETF Options to Target the Small-Cap Opportunity

As investors build a well-diversified investment portfolio, small-capitalization stock exchange traded funds may help enhance returns over the long haul.

Small-cap stocks may compensate investors with higher return potential. Over the very long term, small-cap stocks have generated higher returns than their larger counterparts, but investors should note that small-caps also experience short-term periods of underperformance in between.

Looking ahead, the U.S. economy is still slowly expanding and the Federal Reserve is embarking on a tighter monetary policy outlook. Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.

Small-caps are focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.