Small-cap investments spike amid diversification trend

by / ⠀News Stocks / July 22, 2024
Investment Spike

Small-cap stocks have seen a notable increase in investments recently. This trend signals a diversification move among investors. Dave Nadig, an ETF journalist and financial futurist, believes this is a prudent strategy, especially in an election year.

“What we’re seeing is a diversification trade,” Nadig said.

“Investors are now, for the first time in ages, buying value, defensive sectors, and small caps without abandoning other investments. This indicates people are looking to get broader exposure.”

Nadig attributes this broadening to a significant pool of money in money markets.

He suggests that a part of this capital is now flowing into small caps, though the sustainability of this trend is yet to be seen.

Small-cap investments trend analysis

“If we have a sustained rally in small caps over two or three months, you’ll see a lot of money chasing that performance.

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However, if this is a re-diversification trade, it could result in moderate growth for the rest of the year,” he said. The Russell 2000 index, which tracks small caps, dropped 0.6% on Friday but ended the week with nearly a 2% gain. The index has risen almost 8% over the past month, although it has remained largely flat since President Joe Biden’s inauguration in January 2021.

Anna Paglia, who develops global ETF strategies for State Street Global Advisors, noted that expectations of interest rate cuts could bolster sector laggards. She emphasized that while investors are becoming comfortable with risk, she does not anticipate a significant withdrawal from money market accounts since most of the money there is “sticky.”

“Investors want to keep cash for specific reasons, and I don’t foresee a huge wave of reallocations to the stock market or ETFs from money market funds,” Paglia stated. This increased engagement with small-cap stocks could reflect a broader risk appetite among investors, though the longevity of this trend remains uncertain.

About The Author

April Isaacs

April Isaacs is a staff writer and editor with over 10 years of experience. Bachelor's degree in Journalism. Minor in Business Administration Former contributor to various tech and startup-focused publications. Creator of the popular "Startup Spotlight" series, featuring promising new ventures.

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