Small Could Be the Next Big Idea

The Federal Reserve kicked off its rate-cutting campaign, and historically, a supportive Fed helps small-cap relative performance. Therefore, it would seem that advisors should consider moving portfolio exposure down cap size to position for that potential outperformance.

The first question is, what do you believe? If you believe that the most likely path for the economy in 2025 is for trend growth that will not exceed 2.5% and inflation that stays below 3%, then those are positive conditions for small-cap outperformance.

Beyond this one factor, there are others that could provide an opportunistic setup for small caps:

Existing Considerations

• When the yield curve is positive, small caps tend to outperform. Currently, that presents an opportunity as the yield curve is back to a positive slope for the first time in two years, but small-cap stocks have continued to lag their S&P 500 large-cap counterparts.
• Large-cap concentration is extreme, and the top 1% of the Russell 1000 names comprise one-third of the Index weighting. When things become this stretched, mean reversion is likely.

Emerging Trends

• If the U.S. Dollar continues to fall, that has historically been a tailwind for small caps.
• If the M&A cycle picks up, that will also boost small cap outperformance.

The following is a potential roadmap for advisors setting up small-cap portfolios with Pave Pro:

Advisors can benchmark client portfolios to the Russell 2000 to aim for a small-cap risk and return profile. To maintain exposure to mid and large cap equities, create and apply a Buy List that contains tickers across market cap categories.

If advisors believe the Dollar will fall, they can also tilt towards value by moving Pave Pro’s Investment Style Factor Tilt from “Balanced” to “Value,” which typically outperforms during periods of secular Dollar weakness. If you believe the Fed will continue to cut rates aggressively and are predominantly dollar bearish more than value oriented, you can select “Overweight” in the U.S. Dollar Sensitivity Factor Tilt. That choice creates a portfolio whose assets are more sensitive to the dollar and could also include growth names.

“Pave Pro has the potential to save my firm millions each year by replacing our 3rd party managers.” - RIA, $500M AUM¹

‍

Disclaimer

Copyright © 2024 Pave Finance, Inc. All rights reserved.
You are receiving this email because you opted in through our product or website

1. Testimonial provided by Josh Allen in April of 2024. Josh is a current client of Pave Finance, Inc. No compensation was provided in exchange for this testimonial.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

We take protecting your data and privacy very seriously. Please see our privacy policy here.

Pave Investment Advisors, LLC is an SEC Registered Investment Advisor. Such registration does not imply any level of expertise.

Securities offered through Pave Securities, LLC – New York, NY. Member FINRA/SIPC. You can review Pave Securities LLC with FINRA’s BrokerCheck BrokerCheck.

Advisory Services are only offered through Pave Investment Advisors, LLC., an SEC Registered Investment Advisor which is an affiliate of Pave Securities, LLC.

Pave Securities, LLC and Pave Investment Advisors, LLC do not offer tax or legal advice.

The news, resources and articles available on this site are being presented for educational purposes only and should not be considered specific investment or planning advice applicable to each individual.

Please see ADV Part 2A here and Form CRS here.

For Additional Information and Important Disclosures please click here.