Should Investors Avoid Small-Caps? | ETF Trends

Many investors are divesting from small-caps in fear of a recession, but that may not be the best strategy.

Small-caps are inherently more volatile than their larger-cap peers. However, if the economy falls into a deep recession, small-caps might not decline as much as investors expect. Historically, the small-cap sell-off is overdone and leaves investors poorly positioned for the early-cycle bull market.

Small-caps have historically snapped back in first year of a bull market rally. Notably, early-cycle bull markets are when small-caps have tended to outperform.

“Some advisors are looking to add exposure to small-cap stocks before year-end, but are uncertain given the risks,” said Todd Rosenbluth, head of research at VettaFi. “ROSC provides exposure to higher-quality small-cap stocks with attractive valuation and strong momentum. These stocks could benefit when the market rallies.”

The Hartford Multifactor Small Cap ETF (ROSC) may be a solution for investors looking to add exposure to small-caps without taking on too much volatility risk. Using a multifactor approach, ROSC aims to outperform cap-weighted indexes over a complete market cycle with up to 15% less volatility.

Since it’s nearly impossible to perfectly time the market, investors may consider creating a long-term allocation to small-caps. In the current environment, investors have the opportunity to buy into small-caps while valuations are low, maximizing future upside potential.

Under the Hood of Small-Caps ETF ROSC

A multifactor ETF focused on delivering exposure to small-caps looks very different from small-cap benchmarks.

Multifactor ETFs seek to solve concentration and volatility risks by targeting desired return-enhancing factors and reducing unrewarded risk exposures. This is particularly impactful in the small-cap space, as the segment of the market tends to be more volatile.

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.