Domestic equities are performing well this year amid three interest rate hikes by the Federal Reserve. Historical data suggest this is not a surprising trend, but the data also pinpoint some corners of the equity market that often perform well as borrowing costs climb.
Small-cap exchange traded funds, including the iShares Russell 2000 ETF (NYSEArca: IWM), are among the domestic equity funds impressing as the Fed tightens. Supporting the small-cap’s recent run up, many traders believed smaller companies were insulated from the overseas turmoil. Furthermore, a stronger U.S. dollar and concerns over weaker global growth are also driving investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy.
Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data.
Historically, growth stocks join small caps in performing well in rising rates environments. For example, the iShares Russell 1000 Growth ETF (NYSEArca: IWF) is up nearly 16% year-to-date.
In terms of annualized performance during rising rates environments spanning 1993 to 2016, only the Russell 2000 Index, IWM’s underlying index; has outperformed the Russell 1000 Growth Index, IWF’s benchmark; among FTSE Rusell indexes,.