Rising Interest Rates Does Not Spell Doom for Stock ETFs

“Since the rising rates are happening in a profitable economy with strong growth forecasts and increasing dividend payouts (with an extra boost from the income tax reduction,) the variables impacting the equity duration are more positive for stocks,” Gunzberg said.

Looking at historical data, on average for every 100 basis point increase, every single sector, size and style gained. In comparing the various categories, small-caps led gains with 7.3% on average for every 100 basis point rate increase, followed by mid-caps that gained 5.9% and large-caps that gained 2.5%.

“The growth acceleration that cancels the negative equity duration is the same growth that propels small-caps so much, putting them in a leading spot to rise with interest rates – especially since monetary policy is not too tight so that rising interest rates don’t hinder the borrowing by small companies too much,” Gunzberg said.

Investors interested in gaining exposure to the small-cap segment have a number of options available For instance, the iShares Core S&P Small-Cap ETF (NYSEArca:IJR) follows the S&P SmallCap 600 Index, Vanguard Small Cap ETF (NYSEArca:VB) tracks the the CRSP US Small Cap Index, iShares Russell 2000 ETF (NYSEArca:IWM) reflects the benchmark Russell 2000 Index, and the SPDR S&P 600 Small Cap ETF (NYSEARCA:SLY) is based off the S&P 600 SmallCap Index.

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