Looking down the cap spectrum presents unique opportunities for investors.
An allocation to U.S. small-cap equities has the potential to provide compelling returns for clients. Additionally, targeted exposure to small caps can also help diversify portfolios, particularly those concentrated in mega-cap names.
“The equity market has been led by mega-cap growth stocks, but many advisors want diversification in client portfolios. Small-cap value strategies are worthy of more attention,” Todd Rosenbluth, head of research at VettaFi, said.
There are many reasons why small-cap value stocks are a good buy in the current environment. For starters, small-cap valuations as a whole are at unusually cheap levels. But small-cap value stocks are trading at an even greater discount right now.
While a recession would likely negatively affect small-cap stocks more than their large-cap peers, some strategists have said recession fears are already priced into the small-cap market. This suggests now is an opportunity for investors to add exposure while prices are low. Investing in smaller developing companies that are earlier in their growth curve, while trading at discounted valuations, also offers greater upside potential.
Additionally, both the size and value factors tend to work in bear markets, particularly when paired together. Small caps have also historically led early in bull markets, making them well-positioned for the current environment.
Invest in Small Caps With Less Volatility
A challenge in small-caps stocks, however, is the inherent greater volatility. A multifactor strategy that aims to reduce risk could help investors maintain their targeted exposure through periods of market turbulence.
The Hartford Multifactor Small Cap ETF (ROSC) aims to outperform cap-weighted indices over a complete market cycle with up to 15% less volatility. ROSC invests in companies in the U.S. small-cap universe that exhibit strong and balanced exposure to the value, momentum, and quality factors.
For more news, information, and analysis, visit the Multifactor Channel.
Investing involves risk, including the possible loss of principal.
This article was prepared as part of Hartford Funds paid sponsorship with VettaFi. Hartford Funds is not affiliated with VettaFi and was not involved in drafting this article. The opinions and forecasts expressed are solely those of VettaFi. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, a recommendation for any product or as investment advice.