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Why Investors are Gravitating Toward Small-Cap, Domestic EFTs

While small-cap stocks have the reputation of posing a greater financial risk, especially during times of high volatility, analysts are recommending some EFTs that could be a good investment amongst factors like rising inflation rates, geopolitical tension between Russia and Ukraine, and rate hikes initiated by the Federal Reserve.

Russia-Ukraine Conflict

The effects of Russia’s invasion of Ukraine and the subsequent aftershock felt on the stock market have many investors running to domestic, small-cap companies. With the U.S. issuing sanctions and Russia retaliating, the stock market is seeing a significant drop on small and large scales. The Russell 2000 is down 13%, as well as the S&P 500, so small-cap domestic companies seem to be the prime choice right now.

Rising Inflation & Fed Rates

Again, the domestic small-cap companies present themselves as less of a threat compared to larger global companies. According to NASDAQ, “due to smaller operations, small-cap companies can deal with inflationary pressure by quickly increasing prices or changing their source goods and materials.”

Additionally, Federal Reserve rates are expected to raise as soon as March, but small-cap companies should once again be slightly less subject to the effects of this when they are domestically-focused.

Analyst Advice

Analysts have told CNBC that investors should not worry too much about these factors in regards to overall investment strategies; many of these factors are to be expected. According to certified financial planner Brad Lineberger, “all investors should accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation.”

Zach Abrams, CFP and manager of wealth management at Capital Advisors Ltd., advises to focus on the factors that really matter, like dividend yields, earnings growth and changes in valuation, since these are the main indicators of long-term market returns.

EFTs to Invest In

Keeping in mind the factors discussed above, NASDAQ listed a few EFTs that have momentum right now, including Sprott Junior Gold Miners EFT, Pacer US Small Cap Cash Cows 100 EFT, and Invesco S&P SmallCap Value with Momentum EFT. Zachs EFT Rank is another great resource that tracks ETFs closely with a variety of strong screeners.


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