The equities market could see small-caps outrunning their large-cap peers. More investors are shifting to small-cap stocks, which could be in the early stages of a rally.
CNBC noted that traders are repositioning their plays from big tech names and into small-cap stocks. The S&P 500's gains have been largely driven by the prospect of the Federal Reserve cutting interest rates. That is spilling over into small-cap names.
"The shift to small caps also comes as investors grow increasingly excited that the Federal Reserve will soon begin lowering interest rates, a move seen as particularly helpful for smaller and more cyclically oriented companies," the CNBC report confirmed.
From a fundamental perspective, lower rates could also mean less debt service costs for small-caps. In turn, this could improve the bottom line for many small-cap companies that rely on debt to fund its operations.
The prime indicator of small-cap stocks, the Russell 2000, is already showing signs of catching the S&P 500. Compared to the S&P 500, there's about an 8% difference in year-to-date performance when compared to the Russell 2000. The latter has made a sharp move to the upside. That is catching the attention of retail investors.
"Now, the Russell’s longer-run underperformance versus the S&P 500 has started to reverse, and small investors are taking notice," DataTrek wrote, according to an Investopedia article. "Attention drives capital flows."
^RUT data by YCharts
Triple Exposure to Small-Caps
If the small-cap rally continues to run hot, traders can triple their exposure with leveraged funds like the Direxion Daily Small Cap Bull 3X Shares (TNA). The fund tracks the aforementioned Russell 2000, which, as its name states, measures the performance of approximately 2,000 small-capitalization companies in the Russell 3000 Index.
It remains to be seen if TNA can catch up to or even surpass the Direxion Daily S&P 500 Bull 3X Shares ETF (SPXL). Based on their year-to-date performances, there's about a 20% performance gap between the two. But that could close if investors continue shifting from large-caps to small-caps once the central bank cuts rates.
Large-cap equities may have already priced in cuts, thereby giving small-caps more room to run. Small-caps tend to make outsized moves toward the upside when markets are trending higher, allowing traders to maximize profits with leveraged funds like TNA.
SPXL data by YCharts
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