Rate cuts may be a compelling reason for investors to fill gaps in exposure to small- and mid-cap quality ETFs.
The Federal Reserve slashed interest rates on September 18, reducing the target range for the federal funds rate by a half point. This marks the first rate cut since March 2020, with the Fed projecting another half point of rate cuts later this year.
The half-point move announced on September 18 paves the way for lower borrowing costs, easing a key headwind for small- and mid-cap companies.
Many smaller companies depend on the capital markets to fund their growth. Lower rates will make it easier for small and mid-cap names to seek that funding.
The Invesco S&P MidCap Quality ETF (XMHQ ) and the Invesco S&P SmallCap Quality ETF (XSHQ ) may be a solution for investors that don’t want to miss out on the growth potential of small- and mid-cap names.
How Invesco’s Quality ETFs Are Positioned During Rate Cuts
XSHQ has accreted $316 million in assets since its launch in 2017. The small-cap quality ETF is made up of 120 securities in the S&P SmallCap 600 Index that have the highest quality scores. The quality scores are calculated based on three fundamental measures. These include return on equity, accruals ratio, and financial leverage ratio.
The top two names in XSHQ as of September 17 include Mueller Industries (MLI) and Jackson Financial Incorporation (JXN).
Meanwhile, XMHQ offers quality mid-cap exposure. XMHQ’s underlying index includes the 80 securities in the S&P Midcap 400 Index that exhibit the highest quality scores. Like XSHQ, the quality scores are calculated based on return on equity, accruals ratio, as well as financial leverage ratio.
The mid-cap ETF has grown significantly in recent years. XMHQ has $5.4 billion in assets under management.
Furthermore, top names in XMHQ include Manhattan Associates MANH and Williams-Sonoma WSM.
XMHQ charges 25 basis points and XSHQ charges 29 basis points.
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