From September through November, small-cap stocks and related ETFs notched impressive gains. But just as with the broader market, smaller stocks have fallen on hard times this month.
The Russell 2000 and S&P SmallCap 600 indexes are each off nearly 1% over the past 20 days. Those declines may be giving some investors pause about small-caps heading into 2025. On the other hand, plenty of market observers believe small-cap equities may shine in 2025. And investors can mitigate some of the risk associated with the asset class by tapping into the quality factor.
The WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS ) is an example of an ETF that obliges when it comes to the combination of quality and small-cap exposure. That combination has rewarded patient investors. Over the past three years — a period in which the Russell 2000 and the S&P SmallCap 600 gained an average of 7.35% — DGRS jumped 20%. Past performance isn’t a promise of future upside. But the stars could be aligning for DGRS to deliver for investors in 2025.
DGRS Could Be 2025 Small-Cap Leader
A variety of factors could bode well for smaller stocks in 2025. One factor is the notion that President-elect Trump’s economic policy will be heavily domestically focused. Another is that hopes that the Fed will be aggressive with monetary easing.
“A potential fourth ‘shadow catalyst’ exists in the rates market. In our view, declining interest rates would also be additive for small caps, provided that decreases are not provoked by material weakening,” noted WisdomTree’s Brian Manby. “However, the interest rate environment and its implications for small caps will be challenging to accurately [forecast. That’s because] markets will have to evaluate the effects of tariff policy and potential inflationary impulses.”
Regarding the potential benefits of the quality/small-cap combination as a 2025 investment strategy, Manby highlighted some of the DGRS “secret sauce,” or how the ETF implements quality.
Another Potential Perk
DGRS’s underlying index “identifies dividend-paying small caps and ranks them on quality factor components like return on equity (ROE), return on assets (ROA) and estimated earnings growth. The final stock basket consists of the top 50% of companies from the ranked universe,” added Manby.
The ETF offers another potential perk. Some market observers believe cyclical stocks could continue rallying in the new year. That’s relevant because it pertains to DGRS. That’s because financial services, consumer discretionary, and industrial stocks combine for about two-thirds of the DGRS roster.
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