Small-cap exposure can give investors amplified moves in the market that they won’t get in large-caps, as long as they’re willing to accept the inherent risks in small-cap equities. They can also offer dividend exposure, which can be useful in times like now when inflation is high.
That said, interest rates could stay high for some time, as taming inflation isn’t something the U.S. Federal Reserve is expected to do overnight. Members of the Fed are already seeing further rate increases ahead, though the capital markets are expecting that rate hikes will eventually lessen as 2023 moves forward.
“I expect we’ll continue to increase the federal funds rate because we have to bring inflation back down to our 2% goal and in order to do that we need to bring demand and supply into better balance,” said Federal Reserve Governor Michelle Bowman, according to a Fox Business report.
That said, markets could get volatile in 2023 like they were in 2022, which opens up the potential for heavy market fluctuations. Small-caps can be privy to these market moves, so a discerning screener is necessary if investors are potentially looking to add small-cap exposure to their portfolios.
One option is to look at small-cap equities that offer dividends. When interest rates move higher, dividends can provide additional income sources with the potential of more price gains in small-cap equities when markets rally.
Counter Inflation With Higher Dividends
While the bond markets are rallying, dividends could offer potentially more in terms of fixed income options. Small-caps, in particular, could provide investors with higher dividends in lieu of taking on more risk.
That said, investors may want to consider getting small-cap dividend exposure in the convenience of an exchange traded fund (ETF). One fund in particular is worth noting: the WisdomTree U.S. SmallCap Dividend Fund (DES).
Per its fund description, DES seeks to track the investment results of dividend-paying small-cap companies in the U.S. equity market. The fund comes with a 0.38% expense ratio and a 30-day SEC yield of 2.72% (as of February 13).
Overall, DES provides investors:
- Core U.S. small-cap equity exposure to a broad range of dividend-paying companies.
- A way to complement or replace small-cap value or dividend-oriented active and passive strategies.
- The ability to satisfy demand for growth potential and income focus.
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