In a remarkable turn of events, small-cap stocks have achieved their first significant milestone in three years. This resurgence, particularly highlighted by the Russell 2000 index reaching levels not seen since November 2021, has reignited interest among investors, with experts suggesting that 2025 may be a pivotal year for smaller companies. Todd Rosenbluth, a notable figure in the ETF (exchange-traded fund) space, shared insights on CNBC’s “ETF Edge,” positing that these stocks are likely to see increased favorability as interest rates continue to decline post-elections.
What’s driving this renewed interest? The correlation between the current political climate and financial landscapes cannot be overlooked. According to Rosenbluth, the recent dip in interest rates has created an environment where small caps can thrive. As broader market dynamics shift toward a more favorable setting for these stocks, the Russell 2000 has surged impressively, with gains of about 11% in November alone and an astonishing 35% over the past year. This trend indicates a potential shift in investor appetite, with a growing number looking to diversify their portfolios beyond established tech giants.
An interesting dynamic in the market is expected to emerge as investors begin profit-taking in highly valued stocks, described by Rosenbluth as the “Magnificent Seven.” This group includes heavyweights such as Apple, Microsoft, and Amazon. With this potential shift, small caps are positioned to benefit as funds move from these popular large-cap stocks into avenues that offer growth potential in smaller companies. Additionally, the influential Federal Reserve’s easing policies may further catalyze this transition, prompting investors to reconsider their positions and seek opportunities where they may achieve better returns.
For investors looking to capitalize on this small-cap resurgence, there are a couple of notable ETFs that Rosenbluth recommends. The iShares Core S&P Small-Cap ETF shows strong performance metrics, boasting an 11% gain in November. Meanwhile, the VictoryShares Small Cap Free Cash Flow ETF has also shown promise with nearly 8% growth in the same timeframe. These funds provide investors with strategic avenues to tap into small-cap strength, potentially yielding significant returns as the market evolves.
As we look ahead to the upcoming year, a trend toward greater market dispersion is anticipated, with small caps more prominently featured in investor strategies. The groundwork laid over the past weeks could suggest a substantive shift in the market’s landscape. With the political environment changing and interest rates continuing their downward trend, 2025 may indeed mark a pivotal point for small-cap stocks, prompting investors to rethink their investment portfolios and strategies. The next chapter for small-cap stocks could be just around the corner, and it may be time for investors to pay attention.