In an unprecedented turn of events, small-cap stocks have witnessed their first significant surge in three years. This week marked a historic week for the small-cap market as the Russell 2000 Index, which serves as a benchmark for small-cap stocks, claimed its first record high since November 2021. This remarkable performance, characterized by an 11% increase in November alone, could signal a growing preference among investors for smaller, more agile companies as the market landscape shifts.
According to Todd Rosenbluth, head of research at VettaFi, this uptick in small-cap performance can be attributed to a series of economic changes, particularly improvements in interest rates leading up to and following the recent elections. Rosenbluth posits that the declining interest rates create an environment conducive for small caps to flourish, as investors search for avenues beyond traditional large-cap stocks. His insights suggest that the momentum generated from record highs in small-cap stocks may attract investors back into this asset class, potentially marking a resurgence in popularity as we move into 2025.
Rosenbluth’s analysis extends beyond mere statistics; he argues that a shift in investor behavior is central to the renewed focus on small-cap investments. The anticipated profit-taking in high-flying stocks—often termed the “Magnificent Seven” (which includes tech giants like Apple, Microsoft, and Amazon)—is likely to redirect funds into small-cap stocks. This rotation is critical; as large-cap stocks mature, smaller companies may offer more dynamic growth opportunities. Coupled with an easing monetary policy from the Federal Reserve, the conditions seem ripe for a broadening of investor portfolios.
For those looking to capitalize on this upswing in small-caps, Rosenbluth highlights two key exchange-traded funds (ETFs) as promising investment vehicles: the iShares Core S&P Small-Cap ETF and the VictoryShares Small Cap Free Cash Flow ETF. Both of these funds have shown positive returns in November, further validating the optimistic outlook for small-cap equities. As investors increasingly shift away from cash management accounts, spurred by favorable interest rate conditions, ETFs focusing on small caps could become an attractive alternative.
With strong performance metrics and a shifting economic landscape, small-cap stocks are making a compelling case for themselves as viable investment options. If interest rates continue to decline and the economic environment becomes more favorable, small caps could not only regain their pre-2021 momentum but also outperform larger peers in the coming years. Investors who read into these indicators may find that their portfolios benefit greatly from an allocation to small-cap stocks as we head into 2025. As the market evolves, those willing to explore this growing asset class may uncover significant opportunities for growth.