As tariffs roil global markets, small-capitalization domestic stocks have been on a roll.
And that roll could continue, says Salvatore Bruno, chief investment officer at IndexIQ. Mr. Bruno’s firm runs IQ Chaikin U.S. Small Cap ETF (CSML), a $502.8 million exchange-traded fund that was launched in May 2017 and, as its name implies, focuses on small-cap stocks that do most, if not all, of their business in the U.S. The fund has returns of 1.27% so far this year and 6% over the past 12 months.
Small caps tend to perform well during periods of growth, like the U.S. economy is currently experiencing. Moreover, when companies do business primarily in the domestic market, like those in CSML, they tend not to be affected by trade disputes and currency movements.
In an additional tailwind, the Trump administration has rolled back some regulations on business, Mr. Bruno says. This cuts a company’s fixed costs and makes a noticeable difference in the bottom lines of smaller firms. The reduction in the corporate tax rate has also helped companies, Mr. Bruno adds.
CSML tracks the Nasdaq Chaikin Power US Small Cap Index, which provides exposure to stocks based on four major factors: value, growth, technical and sentiment. The fund’s return so far this year is small compared with about 14.5% for the S&P SmallCap 600 Index. Mr. Bruno attributes this to the relatively poor performance of value companies. However, he says he expects this to turn around “because of our belief that cheaper stocks with good growth characteristics can deliver positive excess returns over the long term.”
There are risks with investing in small-caps that investors should bear in mind, says Kiril Nikolaev, an analyst at ETFdb.com. Micro and small-cap equities are considered higher risk than well-established large-cap and blue-chip companies, “because they are less stable in their profitability and may experience more uncertainty, competition and outside pressure.”
Mr. Cowan is a writer in Northern Ireland. He can be reached at [email protected]