As investors navigate an unpredictable market landscape, small-cap stocks might be on the brink of a resurgence. With the Federal Reserve signaling potential rate cuts, the conditions could soon favor companies that thrive on lower borrowing costs.
In an exclusive interview with Benzinga, Ed Egilinsky, Managing Director at Direxion, shared his views on the evolving small-cap sector.
“Small caps tend to be more reliant on taking on debt to help grow their business, and borrowing at lower rates could be helpful to their bottom line,” he noted. With potential rate cuts on the horizon, Egilinsky believes there are trading opportunities within the small-cap space.
Read Also: Small Caps Set For A Comeback? Here’s Why They Deserve Your Attention
The Bull Vs. Bear Debate: Where Should Traders Bet?
For those looking to ride the wave, leveraged ETFs like the Direxion Small Cap Bull 3X Shares TNA and the Direxion Small Cap Bear 3X Shares TZA could be valuable tools. “We’ve seen significant inflows from traders tilted toward the bull side through our 3x bull TNA,” Egilinsky shared, pointing to recent trends that suggest a bullish outlook.
Investors looking for non-leveraged diversified exposure to the small-cap space may also consider ETFs tracking the Russell 2000 index. The Russell 2000 Index is one of the more popular indices tracking the performance of 2,000 small-cap companies. Popular ETFs tracking the index include: the iShares Russell 2000 ETF IWM and the Vanguard Russell 2000 ETF VTWO.
Fed Policy, Market Sentiment: A Recipe For Volatility?
Egilinsky highlighted the impact of a potential Fed pivot on small-cap stocks, suggesting that these companies might outperform their larger counterparts as borrowing costs decrease.
“If you adhere to the theory of mean reversion, you might believe at some point that small caps on a relative valuation basis might represent a better opportunity than large caps,” he explained.
Active traders should remain vigilant, ready to capitalize on both bullish and bearish movements in the market.
With a dynamic year ahead, the small-cap sector offers plenty of opportunities for those looking to diversify their portfolios beyond the dominant large-cap names.
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