The Area Of The Stock Market That Could Be Set To Explode

Piggybacking off of Tuesday’s Juice where we discussed the emergence of dividend stocks as interest rates, particularly APYs on cash deposit accounts, fall, today we consider another type of stock that could be due for some significant upside. 

In May, The Juice started the conversation around small cap stocks. After The Fed’s half-point rate cut, it’s time to review and revisit. 

We love turning you on to opportunities. But, as we admitted earlier in the year, as much as we have crushed it with a broad selection of big names, we have tended to ignore small caps:

So, as the leaders of the stock market (do we even need to repeat these mega and large cap tech names who also lead AI?) falter here and there, maybe the landscape is shifting. 

One way to illustrate this is by looking at the S&P 500 Equal Weight Index, which tracks the S&P 500 stocks equally, not by market cap. Therefore, the returns aren’t skewed wildly by the biggest names in the index. One of the leading S&P 500 equal weight ETFs is the Invesco S&P 500 Equal Weight ETF (RSP). 

RSP is no longer getting trounced by SPY and QQQ. In fact, it recently hit an all-time high.

This came from a Juice with the title, The Most Popular ETF The Juice Never Talks About.

Indeed, the iShares Russell 2000 ETF (IWM) is a perennial top five ETF in our Trackstar database of the tickers investors search for most among all ETFs. And it’s the best way for long-term investors to get exposure to small caps.

So let’s update our lead-in to the case for small caps. The idea that market breadth could portend upside for not only equal-weight ETFs, but small caps as well. The idea that, yes, the landscape is shifting and investors are branching out beyond big-name tech and AI stocks. 

It’s pretty crazy, actually. Over the last month, RSP (the equal weight version of the SPDR S&P 500 ETF (SPY)) has outperformed SPY by just about double. RSP has also outperformed the Invesco QQQ Trust (QQQ) over the same time period. So the market breadth argument remains intact. 

But, has it extended out to small caps yet? 

Throw IWM into the mix and you’ll find that —since the second week of September — it has actually held its own or outperformed all three of the above-mentioned ETFs.  

Not too shabby. 

If you extend these looks back to one year, you’ll see sound performances from IWM and RSP, but you would have also seen an additional 7% to 9% worth of upside from SPY and QQQ. So the tables are turning, even if slowly. Which makes The Juice think now is the time to act: 

• Buy IWM to get the exposure to small caps you might be missing
• Buy RSP to take advantage of market breadth and even out your broad market exposure 

We’re not the only ones looking at small cap stocks. 

We mention Wisdom Tree a lot here in The Juice because they know their stuff. Here’s what the fund company has to say about small caps in its most recent report on the subject:

Going forward, we think small caps can continue to benefit from gradually easing monetary policy, reasonable economic growth (i.e., avoiding a near-term recession) and attractive valuations.

Within our Model Portfolios, we remain modestly over-weight in U.S. mid- and small-cap stocks relative to their larger counterparts…

Looking ahead, we think this rotation may have legs, as small caps have historically outperformed larger companies in the 12-month period following the first Fed rate cut in a monetary policy easing cycle. (emphasis added)

Obviously, that last part is key. Short and sweet, but oh so complete today. The Juice thinks you should add IWM to your portfolio to beat the rush. Or before the fools rush in. 

The Bottom Line: What do we love more than the stock market we have been investing in over the last year or two? A stock market with a wider variety of companies who are crushing it. 

If you’re going to take profits in, say, Nvidia (NVDA), you have somewhere else to put that extra cash now. Somewhere other than a savings or other cash account that will be seeing rate cuts soon, if they haven’t already. You can go with dividend stocks or small caps. 

In a perfect world, The Juice thinks you should be buying both now, alongside what you’re already doing with the recent market leaders.

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