In a surprising turn of events, small-cap stocks have made a remarkable resurgence, marking their best week in three years. According to investment expert Todd Rosenbluth from VettaFi, this resurgence is more than just a short-term blip; it points toward a shift in investment strategy that may unfold over the next couple of years. As interest rates show signs of easing, there’s a growing sentiment that the small-cap sector will not only maintain this momentum but also attract a new wave of investor interest by 2025.

Rosenbluth recently shared insights during an interview on CNBC’s “ETF Edge,” where he highlighted significant trends in the small-cap market. He substantiated his claims by referencing the Russell 2000 index, which specifically tracks small-cap stocks and has recently hit its highest level since November 2021. Reflecting on the past year’s performance, the index has soared nearly 35%, showcasing the growing confidence among investors. This impressive upward trajectory indicates a reversal of fortunes for a sector that had been largely overlooked in favor of larger, more established companies.

Further supporting this trend is the changing landscape of investor sentiment. With many investors poised to take profits from big-name tech stocks, commonly dubbed the “Magnificent Seven”—including heavyweights like Apple, Tesla, and Amazon—money is likely to flow into smaller companies. Rosenbluth believes that as more capital enters the small-cap arena, it will create favorable conditions for growth potential in this sector.

This shift can also be attributed to the Federal Reserve’s recent changes in interest rate policies. With rates declining, the allure of small-cap investments is likely to intensify as profit-taking from larger equities may provide extra fuel for smaller firms. Small caps tend to be more sensitive to economic changes, and as the economy shows signs of recovery, investors may increasingly seek out small-cap opportunities as a way to enhance their portfolios’ performance.

Rosenbluth suggests two Exchange-Traded Funds (ETFs) that could leverage this small-cap momentum effectively: the iShares Core S&P Small-Cap ETF and the VictoryShares Small Cap Free Cash Flow ETF. Currently, both funds are showing commendable returns, with the former up 11% for the month of November and the latter not far behind at nearly 8%. These funds could serve as strategic options for investors looking to broaden their exposure and capitalize on the expected growth in small-cap stocks.

As the market evolves and investors look for new opportunities, the small-cap sector could become an attractive choice, particularly as broader economic conditions improve. With a promising outlook leading into 2025, the small-cap market could reshape the investment landscape, inviting a more diversified approach to portfolio management. Investors would do well to keep a keen eye on this developing trend, as small caps appear poised to reclaim their place in the limelight.

Finance

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