The recent uptick in money flowing into small-cap stocks may not be solely a result of a rotation from winning growth trades, according to Dave Nadig, an ETF journalist and financial futurist. In fact, Nadig believes that investors are simply diversifying their portfolios by “just buying, buying, buying.” This trend towards diversification is seen as a smart move, especially in an election year as investors aim to broaden their exposure to different market sectors.
Reducing Volatility
Nadig argues that broadening exposure in portfolios can help absorb volatility, particularly in the months leading up to presidential elections. He notes that investors are now showing interest in buying value stocks, defensive sectors, and small caps alongside their existing investments. This shift is seen as a way to reduce risk and increase stability in investment portfolios.
Despite the recent surge in small-cap stocks, Nadig remains cautious about the sustainability of this upside. He suggests that if small caps continue to outperform large caps consistently over the next few months, there may be a significant influx of capital into this segment. However, if the current trend is more of a re-diversification trade, he anticipates that the small-cap market will experience some fluctuations throughout the year.
The Russell 2000 index, which tracks small caps, experienced a slight decline on Friday but still managed to outperform other major indices such as the Dow Industrial Average, the S&P 500, and the Nasdaq Composite. Despite the minor setback, the Russell 2000 recorded a weekly gain of almost 2% and has seen an overall increase of nearly 8% in the past month. However, the index has remained relatively stagnant since President Joe Biden assumed office in January 2021.
Anna Paglia, who oversees global ETF strategies at State Street Global Advisors, attributes the strength in sector laggards to expectations for interest rate cuts. She believes that investors are becoming more comfortable with risk and predicts a momentum in the market. However, Paglia does not foresee a significant shift of funds from money market accounts, as she believes that most of the cash in these accounts is likely to remain stable.
The recent surge in small-cap stocks reflects a broader trend towards diversification and risk management in investment portfolios. While uncertainties remain regarding the sustainability of this rally, investors are increasingly looking to hedge against market volatility and explore new opportunities for growth in various sectors.