ETF Investors Should Look to Small-Cap, Growth as Rates Rise

With the Federal Reserve embarking on monetary policy normalization and raising interest rates ahead, ETF investors may do well with small-cap and growth exposures.

With yields on benchmark ten-year U.S. Treasuries recently crossing above 3% and the Federal Open Market Committee continuing to tighten its monetary policy, FTSE Russell examined performance of an array of asset classes during periods of rising interest rates.

Over the past 25 years, the equity market has performed well during periods of rising interest rates, Alec Young, Managing Director of Global Markets Research, FTSE Russell, said in a research note. Since rates often rise in reaction to accelerating economic growth, this type of growing environment is is ultimately good for corporate profits and, hence, stock prices.

“Not surprisingly, economically sensitive equity asset classes like small caps have fared best, with the Russell 2000 Index generating a healthy 22.2% annualized return while the Russell 1000 Growth Index has also chalked up an impressive 20.1% annualized return. The large cap Russell 1000 Index has posted a very respectable 16.2% return while the Russell 1000 Value Index has risen 12.5% and the FTSE Nareit All Equity REITs Index has risen 7.5%,” Young said.