When debt is made manageable for small-cap companies, it can almost act like a growth accelerant. Invesco has a trio of ETFs worth considering when rate cuts eventually take place.
As mentioned in a Yahoo Finance report, small-cap companies have been under pressure for the past few years. That’s because high inflation and high interest rates have been eating into the bottom line. And that is due to higher debt service costs. As opposed to large-cap companies, small-cap companies can be more reliant on debt to fund operations.
The prospect of interest rates easing could be a boon for small-cap companies that can then refinance their current debt load with loans that carry lower interest rates. As such, investors can expect a potential rally if small-caps respond to the upside, that would make them a relative value in the current market versus their larger-cap counterparts.
“Consequently, some small-cap stocks are currently trading at negative enterprise values — a rare occurrence,” the report stated. “While predicting how these stocks will respond to rate cuts is difficult, one likely outcome is a broad rally within this segment of equities.”
Therefore, it’s an opportune time for investors to get broad small-cap exposure via funds such as the Invesco S&P Smallcap 600 Pure Growth ETF (RZG). The fund is based on the S&P SmallCap 600® Pure Growth Index. That index measures the performance of securities that exhibit strong growth characteristics in the S&P SmallCap 600 Index. In the case of RZG, growth factors are measured by sales growth, earnings change to price, and momentum.
2 More Small-Cap Opportunities
Investors who are more risk averse may want to lean on quality. They could consider the Invesco S&P SmallCap Quality ETF (XSHQ). This fund tracks the S&P SmallCap 600 Quality Index (SP6QUP). The index is deeply diversified, consisting of 120 securities in the index that have the highest score. The score is calculated based on the average of three fundamental measures: return on equity, accruals ratio and financial leverage ratio.
Rate cuts could feed into a small-cap rally, thereby increasing their momentum. That said, the momentum factor can be advantageous for funds like the Invesco S&P SmallCap Momentum ETF (XSMO). The fund tracks an index comprising 120 securities in the S&P SmallCap 600 Index that have the highest “momentum scores.” Those scores are calculated under the index methodology. The methodology is computed by measuring the upward price movements of each security as compared to other eligible stocks within the S&P SmallCap 600 Index, according to Invesco.
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