This article was originally published on ETFTrends.com.
Much has been made of the recent malaise of small-cap stocks and ETFs as the gap between that group and large caps has been noticeably wide, but it’s also possible that smaller stocks rebound in intense fashion over the near-term.
SIZ “provides consistent exposure to the size factor by investing in the underlying index which reconstitutes and rebalances monthly in equal dollar amounts in equally weighted long smaller market capitalization positions and equally weighted short larger market capitalization positions within each sector,” according to the issuer.
Fortunately, there's a potential catalyst on the horizon to boost small caps: the possibility of the U.S. and China making nice on trade.
Making Nice With Trade Talks
“Investors might still remember small-caps’ stellar run in early 2018 when trade-war fears drove more assets into the group, which is typically less exposed to international markets,” reports Evie Liu for Barron's. “That thinking has changed, with investors realizing that in today’s globalized economy, no asset class is safe in a full-blown trade war.”
Due to the domestic focus of small-cap companies, it was also believed these stocks would be less vulnerable to global trade spats, but recent price action in the group suggests otherwise. Market observers warned that small caps often struggled as economic expansions neared their end, especially since they are hampered by rising wages and borrowing costs, which may be particularly likely in the years ahead.
While that thesis has recently been dealt a blow, SIZ could rally if the trade discussions progress in a productive manner.
Small-cap funds have been stymied in recent months by exposure to bank stocks, which are being crimped by declining interest rates, but the worst news for small-cap banks, a group hit hard by declining Treasury yields, may already be baked into the stocks. That adds to the near-term case for SIZ.
“But fears over banks’ profitability might have been overdone, as many of them are in a much healthier financial state compared with 10 years ago, during the financial crisis,” according to Barron's.
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