Why now is the time to buy small-cap ETFs: Strategist

Matt Kaufman, Calamos head of ETFs, joins Wealth! to offer insight into the best small-cap ETFs and why now may be a good time to start buying into them.

"We're seeing the Russell 2000, a broad measure of small-cap stocks, still about 17% off its record high from 2021. And so a lot of this underperformance is really interest rate driven because small caps rely much more heavily on external financing than their larger companies. So, over the past couple of years in that small-cap space, we've seen lower earnings, lower margins. The cost of capital has gone up, along with interest rates. Today, we think this is largely priced in, and so if interest rates do begin to fall again, we may see one cut or so this year; we could see a surge in small-cap prices as a result," Kaufman tells Yahoo Finance.

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This post was written by Nicholas Jacobino

Video transcript

Well, we've all seen the headlines.

Tech is driving the markets higher.

This year, the tech sector is up around 20% year to date, compare that to small caps which are up less than 1%.

Despite the trend, our next guest thinks now might be the time to get into small caps to discuss.

Let's bring in Matt Kaufman Calamos head of ETF S here as part of the ETF report brought to you by invest QQQ.

Great to see you.

Ok.

So walk us into the thesis here, Matt for why we could see perhaps a trend in a new direction.

Yeah, good to see you again.

Uh this year, year to date small cap stocks, they're trailing large cap stocks as that chart showed by the largest amount that we've seen on record since 1998.

It's about a 14% dislocation relative to the S and P 500.

So, you know, as you've said, we've seen large caps really enjoying a nice run since the down market of 2022 and small caps really didn't participate in that run.

We're seeing the Russell 2000, a broad measure of small cap stocks still about 17% off its record high from 2021.

And so a lot of this underperformance is really interest rate driven because small caps rely much more heavily on external financing than their larger companies.

So, you know, over the past couple of years in that small cap space, we've seen lower earnings, lower margins.

The cost of capital has gone up along with interest rates.

Today, we think this is largely priced in.

And so if interest rates do begin to fall again, you know, we may see, you know, one cut or so this year, um we could see a surge in small, in small cap prices as a result.

So as those falling borrowing costs um occur, that really can become a tailwind for small cap stocks.

How detrimental is the timing if we don't see a cut until December versus what's being projected right now or has the leading probability for that first cut of September?

What is the kind of net delta if you will for performance of small caps over the course of this year, if we did see it delayed?

Yeah, we think a lot of that um underperformance like again is priced in and we're already seeing um some of that out performance occurring.

We have a Timpani mutual fund, small cap mutual fund that's starting to outperform its competitors and perform well in that small cap space.

But you're right, we do see volatility in that small cap space.

And so we're encouraging people to look at the small cap area but enter it with a measure of risk management.

OK.

So what are some of the top ETF s that you're seeing investors flow into right now with this strategy in mind?

Yeah, there's a couple of products that we're seeing people.

Um you know, being able to poise for that rally in small caps.

On Monday, we launched CPR J which is a 100% downside protected ETF that gives you exposure to the Russell 2000.

And so we launched that on Monday, the cap rate on that product is 11.2% which is the highest cap rate of any capital protected one year product in the market today.

So it allows you to participate in potential growth in small caps, but in a way where you don't participate in those downside moves over the next year.

So for folks with, you know, one year time horizon or greater moving into a capital protected Russell 2000 product like CPR J, I think makes a lot of sense for folks.

And then the second product we're seeing just to, you know, do next, next 10 seconds.

Here is C VRT.

It's a convertible uh product which is uh owns convertible bonds, largely issued by small mid cap stocks.

And so those are high equity sensitive uh convertibles.

We see a runoff potential in that as well.

Matt, great to catch up with you Matt Kaufman, who is the Camos head of ETF S?

Appreciate it.