Small-cap stocks have recently made headlines, achieving their first significant milestone in three years. A notable surge in their performance is suggesting a potential shift in investor sentiment. As Todd Rosenbluth from VettaFi pointed out in a recent segment on CNBC’s “ETF Edge,” there’s a growing belief that 2025 will witness small-cap stocks regaining favor once again. The market’s focus seems to be transitioning as interest rates stabilize post-election, indicative of a broader economic recovery.
The Russell 2000 index, which is pivotal for tracking small-cap performance, has shown remarkable resilience. It recently reached a record high for the first time since November 2021, marking a notable turnaround. This surge, combined with a substantial monthly gain—even seen as the best since last December—signals a favorable climate for small-cap investments. Notably, in November alone, the index experienced an impressive increase of nearly 11%, culminating in a remarkable 35% growth over the past year. These statistics draw investors’ attention back towards small-cap investments, as they may represent untapped potential compared to their larger counterparts.
An interesting point raised by Rosenbluth pertains to the anticipated sector rotation within the market. Investors might reconsider their heavy investments in high-performing stocks commonly referred to as the “Magnificent Seven,” which encompasses tech giants like Apple, Microsoft, and Amazon. As these stocks have continually performed well, a natural inclination towards profit-taking may emerge. This could create ample opportunities for small-cap stocks to attract renewed interest. Moreover, as the Federal Reserve’s policy concerning interest rates continues to evolve, the anticipated movement away from money market accounts could result in capital flowing into various sectors, including small caps.
For those looking to capitalize on this small-cap momentum, there are specific Exchange-Traded Funds (ETFs) that warrant consideration. Rosenbluth specifically mentioned the iShares Core S&P Small-Cap ETF and the VictoryShares Small Cap Free Cash Flow ETF. Both have displayed impressive performance metrics this November, with the former seeing gains in line with the overall market sentiment. The targeted strategy of investing through these ETFs provides a pathway for investors to engage with the small-cap segment while mitigating risks associated with individual stock selection.
The prevailing narrative surrounding small-cap stocks is one of optimism. As market conditions become more favorable and investor behavior shifts, the small-cap sector emerges as a beacon of opportunity. With significant gains on the horizon and an anticipated increase in investor resources, small caps could very well take center stage by 2025. As individuals and institutions alike reassess their portfolios, the compelling narrative of small-cap renewals is likely to gain traction, inviting a new wave of investment interest.