Is Now the Time to Buy Small-Cap Stocks?

Market Trends & Dynamics - Small cap stocks and ETFs are currently in focus [1] - Major indexes, including the small cap Russell 2000, hit record highs following a 25 basis point interest rate cut by the Fed, signaling potential for further cuts [2] - The S&P 500 index has significantly outperformed the Russell 2000 over the past 10 years, gaining approximately 302% compared to the Russell 2000's 142% return [3] - Small and midcap companies led a market rally with the Russell 2000 surging 7% in August [3] - The Russell 2000 ETF is up almost 12% this year, outperforming IJR due to holdings benefiting from the AI boom, quantum computing, or nuclear energy [15][16] Investment Opportunities & Risks - Small cap stocks are sensitive to interest rates due to higher debt burdens and floating interest rates, potentially benefiting from expected rate cuts [5][6] - Small cap valuations appear attractive, with the Russell 2000 having a P/E ratio of 1890%, compared to the S&P 500's 2990% [4] - Small cap stocks are dependent on continued economic growth and may underperform if the economy slows down or enters a recession [6][7] - ETFs are a better way to get exposure to small cap stocks due to limited analyst coverage for individual small cap stocks [10] ETF Performance & Characteristics - The iShares Core S&P Small-Cap ETF (IJR) is up about 923% since its inception in May 2000, while the iShares Russell 2000 ETF (IWM) is up about 640% over the same period [8] - The Invesco S&P SmallCap Momentum ETF (XSMO) selects 120 securities with the highest momentum scores and has an expense ratio of 39 basis points [17] - The VictoryShares US Small Cap Free Cash Flow ETF (VFLO) aims to select 200 profitable small cap companies with high free cash flow yields and has an expense ratio of 47 basis points [18][19]