Some market observers attribute it to the “Trump trade” and the president-elect’s victory last Tuesday that the small-caps Russell 2000 Index is up 5.90% over the past week.
However, market trends induced by political outcomes are often short-lived. That indicates that when it comes to smaller stocks and related ETFs, investors would do well to focus on catalysts beyond election results. The WisdomTree U.S. SmallCap Dividend Fund (DES ) is a viable option for fundamentally inclined investors seeking exposure to smaller stocks.
DES is pertinent today because while some chastened investors may be leery of small-caps due to the group’s laggard status in recent years, the ETF’s strategy has paid off. The ETF has outperformed the Russell 2000 and the S&P SmallCap 600 indexes over the past three years. And it’s been less volatile than those gauges over that period. Past performance isn’t guaranteed to repeat. But the current environment for small-caps could be hospitable to the DES methodology.
A Good Time for Small-Caps
Post-election bullishness aside, YTD returns notched by small-cap indexes and DES are solid. However, they are trailing large-cap indicates there are other factors supporting gains — factors that could have durability.
“Moreover, if mark equivalents. Importantly, momentum for smaller stocks started building well in advance of Election Day. Thatets continue their upward trajectory, the small-cap sector could showcase its dynamism. Small-cap companies are more sensitive to economic [cycles. And] history shows us that small caps tend to benefit most from expansionary cycles,” according to BlackRock. “Current valuations for these firms, coupled with an environment of improving earnings-per-share growth could lead to a wider range of these companies delivering competitive returns.”
Looking at potential political effects, Trump wasn’t granted the sweeping mandate previously expected. But it’s clear that political uncertainty has been diminished. The election outcome wasn’t contested. And there’s little chance of budget stand-offs and government shutdowns over the near erm.
Potential Catalyst for Cyclical Sectors
That could augur well for cyclical sectors, which typically react poorly to uncertainty. That’s relevant in discussing DES. And that’s because it devotes ~55% of its weight to financial services, industrial and consumer discretionary stocks.
“As a result of some of this more cyclical sector exposure, the Russell 2000 has lagged the S&P 500, especially during periods of market volatility and increased uncertainty,” added BlackRock.
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