During the Fed's interest rate cut cycle, small-cap stocks may be one of the categories of the market that receives more attention.

In this article, we will discuss how to invest in small-cap stocks in the U.S. stock market under the expectation of an interest rate cut.

Learning benefit: if you want to track real-time interest rate investment strategies, you can unlock and joinFutubull official communication group There is a professional analyst available to answer investment questions one-on-one, and professional mooers sharing real-time money-making opportunities.

Why did small-cap stocks perform poorly in 2024?

In the stock market, investors often classify stocks by market capitalization size.

Generally, stocks with a market capitalization between $0.25 billion and $2 billion are called small-cap stocks, while those with a market capitalization of over $10 billion are called large-cap stocks.

Investors differentiate small-cap stocks from large-cap stocks because these two types of stocks have very different characteristics.

Large-cap stocks are usually larger, more mature companies with relatively small growth potential, but are steady. Compared with large-cap stocks, small-cap stocks are characterized by smaller companies with greater growth potential, but also with higher risks.

In the U.S. stock market, the Russell 2000 index is the most commonly used indicator to track the overall performance of small-cap stocks.

So far this year, the Russell 2000 index, which represents small-cap stocks, has performed poorly, with only a 0.15% increase since the beginning of the year, far behind the S&P 500's 14.61% increase. Morningstar analysts believe that continued high interest rates and market fever for AI stocks are the reasons for the poor performance of small-cap stocks.

The case is for illustrative purposes only and does not constitute any investment advice or guarantee.

Can small-cap stocks benefit from the Fed's interest rate cut?

Generally, in an interest rate cut environment, small-cap stocks may benefit more than large-cap stocks, mainly because small-cap stocks are more sensitive to interest rate cuts.

Because compared to large enterprises, many small enterprises rely more on debt. Interest rate cuts will lower borrowing costs, which means that small companies that rely on bank loans and floating rate debt will reduce their financial costs, thereby increasing profit margins.

Then, how did small-cap stocks perform in historical interest rate cut environments? Investors can take a look at the performance of small-cap stocks after the Fed started cutting interest rates in history.

According to Reuters, Jefferies analyzed data since 1950 and found that small-cap stocks performed better than large-cap stocks after the Fed's first interest rate cut.

After the Fed's first interest rate cut, small-cap stocks rose by 11%, 15%, and 28% after 3, 6, and 12 months, respectively, which were all higher than large-cap stocks' 5%, 10%, and 15%.

Therefore, small-cap stocks may be more affected by interest rate cuts.

How to invest in small-cap stocks?

There are two ways to invest in small-cap stocks: one is to explore high-quality and potential individual stocks, and the other is to invest in the entire sector through ETFs.

Investors can use Futubull to view the constituents of the e-mini Russell 2000 index, and then explore high-quality potential stocks through industry prospects, company finances, company valuation and other indicators.

The following are the top ten constituent stocks of the Russell 2000 index ranked by market cap. The top three in terms of market cap are AI hot stock Super Micro Computer (SMCI.US), Bitcoin concept stock MicroStrategy (MSTR.US), and used car voucher Carvana (CVNA.US). Data source: Futu Niu Niu. Data as of the closing of July 1, 2024. The case is for illustrative purposes only and does not constitute any investment advice or guarantee. The weather is good today The weather is good today.Please use your Futubull account to access the feature.$MicroStrategy(MSTR.US)$ ) and the used car dealer Carvana ($Carvana(CVNA.US)$Although investors can dig out high-quality individual stocks by themselves, investing only in one stock may be very risky. It is best to achieve risk diversification by covering enough small-cap stocks and enough industries.

So indirectly investing in small-cap stocks through investing in small-cap stock ETFs is a good choice, which eliminates the trouble of stock selection.

Although investors can explore high-quality individual stocks themselves, investing in only one stock may be risky, so it's best to diversify the portfolio. To do so, the best practice is to cover enough small-cap stocks and industries.

Therefore, investing in small-cap stock ETFs is a good choice as it saves the trouble of stock picking. In the U.S. stock market, the Russell 2000 index is one of the most popular small-cap stock indices, and there are many ETFs on the market that track the Russell 2000 index, among which the largest is

.$iShares Russell 2000 ETF(IWM.US)$In addition, there are leveraged ETFs and inverse ETFs that track the Russell 2000 Index, such as$Proshares Trust Pshs Ultruss2000(UWM.US)$3x Long Small Cap Stock ETF-Direxion (TNA.US) is a 3x leveraged long ETF.$Direxion Daily Small Cap Bull 3X ETF(TNA.US)$Here we have compiled related ETFs (including leveraged and directional ETFs) that track the Russell 2000 index for your reference.

However, it should be noted that although leveraged ETFs can achieve excess returns, they can also amplify losses, and leveraged ETFs may have decay, so investors should pay special attention when choosing.

Here we have compiled related ETFs (including leveraged and directional ETFs) that track the Russell 2000 index for your reference.

The risks of investing in small-cap stocks

1. High volatility: Small-cap stocks are often more unstable compared to large-cap stocks, and many companies are in an unprofitable state. In other words, the e-mini Russell 2000 index's volatility often exceeds that of the large-cap index, so the risk is relatively higher. 2. Low proportion of technology industry: The industries covered by the e-mini Russell 2000 index are relatively diversified, mainly focusing on industrial, financial, medical care, and non-essential consumer products. Compared with other large-cap stock indices, the proportion of technology industry is relatively low. However, the technology sector is currently one of the hottest in the market, such as ai, cloud computing and chips. If future investments continue to focus on technology, the e-mini Russell 2000 index may miss out on the benefits of the technology sector's rise.

2. The technology sector has a lower proportion: The industries covered by the e-mini Russell 2000 index are relatively diversified, mainly focusing on industrial, financial, medical care, and non-essential consumer products. Compared with other large-cap stock indices, the proportion of the technology industry is relatively low. However, the technology sector is currently one of the hottest in the market, such as ai, cloud computing and chips. If future investments continue to focus on technology, the e-mini Russell 2000 index may miss out on the benefits of the technology sector's rise.

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