While some of the hottest artificial intelligence (AI)-adjacent trades have hit a rough patch recently, broader large-cap equity benchmarks remain near all-time highs — despite a brief pullback on July 7. That’s a sign market breadth is widening.
Some experts go so far as to say a “mega-rotation” is underway and that may be to the benefit of a variety of ETFs, including the NEOS Russell 2000 High Income ETF (IWMI ). The $1 billion IWMI, which turned two years old last month, is a potential centerpiece in the rotation conversation for a simple reason: Small-cap stocks aren’t just participating in that rotation — they’re leading it, as evidenced by the Russell 2000 Index’s 21% year-to-date gain.
As an options-based, income-generating ETF, IWMI won’t capture the Russell 2000’s full upside. However, the NEOS fund still provides for some upside participation while delivering an income stream that’s almost unworldly relative to basic small-cap index ETFs. IWMI carries a distribution rate of 14.42%, which far outpaces standard small-cap index ETFs.
IWMI Can Benefit as Investors Pivot
The post-coronavirus market environment has largely been dominated by large- and mega-cap growth stocks, particularly those with direct AI roads. That worked for several years, but it now appears that investors are ready to broaden the playing field. Small caps, which started perking up last year, are proving to be beneficiaries of the broadening trend, and that could be a catalyst that leads income-hungry market participants to IWMI.
“We believe investors are witnessing the beginning of one of the most important reallocations of capital since the post-pandemic recovery,” noted deVere Group CEO Nigel Green. “For years, returns became increasingly concentrated in a handful of mega-cap technology companies. This trade generated exceptional wealth. It also created extraordinary concentration risk.”
There are other reasons to consider small-cap strategies such as IWMI. For example, smaller stocks are showing remarkable fortitude against the backdrop of the Federal Reserve not lowering interest rates. A rate could arrive later this year, but the fact that the Russell 2000 is up almost 21% year to date without Fed assistance is impressive. Especially when considering small-caps’ rate-sensitive reputation. In addition, there are also sector-specific tailwinds that further support the outlook for broad small-cap funds.
“We believe financials, industrials, healthcare, infrastructure, energy and selected consumer sectors are entering a powerful period of renewed investor demand,” added Green.
Healthcare, financial services and industrial stocks combine for more than 53% of the Russell 2000.
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