As investors navigate the turbulent market landscape, small-cap stocks are emerging as a potential bright spot. The Federal Reserve’s signal of potential rate cuts could create favorable conditions for these companies, which often rely on debt to fuel growth. Lower borrowing costs would translate into improved bottom lines for these businesses.
Ed Egilinsky, Managing Director at Direxion, emphasized the potential benefits of a rate cut for small-cap companies in an exclusive interview with Benzinga. “Small caps tend to be more reliant on taking on debt to help grow their business, and borrowing at lower rates could be helpful to their bottom line,” he explained. He further believes that the upcoming rate cuts present valuable trading opportunities within the small-cap space.
For investors seeking to capitalize on this potential resurgence, leveraged ETFs like the Direxion Small Cap Bull 3X Shares (TNA) and the Direxion Small Cap Bear 3X Shares (TZA) offer targeted exposure. Egilinsky noted, “We’ve seen significant inflows from traders tilted toward the bull side through our 3x bull TNA,” suggesting a bullish sentiment among investors.
However, investors seeking non-leveraged diversified exposure to the small-cap market can consider ETFs tracking the Russell 2000 index. This popular index benchmarks the performance of 2,000 small-cap companies and is tracked by well-known ETFs like the iShares Russell 2000 ETF (IWM) and the Vanguard Russell 2000 ETF (VTWO).
Egilinsky highlighted the potential impact of a Fed pivot on small-cap stocks, suggesting that these companies might outperform their larger counterparts as borrowing costs decrease. “If you adhere to the theory of mean reversion, you might believe at some point that small caps on a relative valuation basis might represent a better opportunity than large caps,” he explained.
The small-cap sector presents diverse opportunities for investors seeking to diversify their portfolios beyond large-cap names. While the market remains dynamic, active traders should remain vigilant and prepared to capitalize on both bullish and bearish movements. The potential for a resurgence in the small-cap space makes it an intriguing sector to watch for those seeking both growth and diversification in their investment strategies.
