Small-cap stocks are poised for a decent 2025. Helped by 3% over the past month, one aided by the Federal Reserve lowering interest rates in September, the Russell 2000 Index is higher by 12.67% YTD.
That sounds pretty good, and it is. But small-cap stocks still present investors with some considerations. And not all of them are positive. For example, the dividend yield on the Russell 2000 is barely noticeable. And it’s unlikely to grow by way of payout increases. That’s because a significant percentage of that index’s constituents aren’t profitable. And that means they’re unlikely to initiate dividends anytime soon.
The NEOS Russell 2000 High Income ETF (IWMI ) could be the ideal elixir for investors looking to extract income from an asset class not often known for it. As its name implies, IWMI is linked to the Russell 2000. More importantly, it delivers on the promise of high income, as highlighted by a distribution rate of 14.56%.
Think IWMI for Small-Cap Income
IWMI isn’t the run-of-the-mill covered call ETF. The ETF sells and buys options contracts on the Russell 2000. So it provides some avenue for upside participation when smaller stocks rally. That’s pertinent at a time when some market observers believe the asset class is finally finding its footing,
Some of that constructive outlook is rooted in the view that the U.S. economy remains on solid ground. It’s also rooted in the view that consumers are still willing to spend. That could possibly increase discretionary expenditures as interest rates decline.
“Despite the setback from higher tariffs, US economic growth is still likely to be stronger than that in most of the rest of the world in 2026,” noted BNP Paribas. “Consumer demand has been [robust. And] the greater customer concentration in the US of small-cap companies should be a benefit to the segment.”
For investors considering IWMI for income and potential broader-ranging catalysts, a spark could arrive via increased mergers and activity. That’s a distinct possibility if rates decline. And that’s because that would make financing for buyers less cost-prohibitive.
“PWC estimates that deal values for the first half of 2025 will have been the highest in three [years. And] now that the benchmark fed funds rate has begun to fall, activity should increase further. Small caps tend to outperform large caps once the US Federal Reserve begins cutting interest [rates. That’s because] they benefit more from lower financing costs,” added BNP Paribas.
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