It was a turbulent start to the year for small-cap ETFs. What could happen next for them after Donald Trump takes office?
• Donald Trump sworn in as US President
• Economic policy with a focus on tariffs, tax relief and reducing bureaucracy
• Smaller companies could benefit disproportionately from Trump 2.0
The development of small-cap ETFs in the first weeks of 2025 is reminiscent of a roller coaster ride: initially, unexpectedly good labor market data raised concerns among investors that the US Federal Reserve could suspend its interest rate cuts until the end of the year. This put a lot of pressure on the iShares Russell 2000 ETF (IWM) because investors fled the benchmark ETF for small caps – which consists of 2,000 small and medium-sized companies from the Russell 3000 index – in droves. However, just a few days later, positively received inflation data caused a significant relief rally in stocks and also boosted the IWM.
“If a large portion of the small cap index is very interest rate sensitive, and these are companies whose earnings can be negative and that are heavily leveraged, their prospects will depend to a large extent on a lower discount rate affecting their future cash flows “So as soon as these stocks get an indication of a reduction in the discount rate, they rise and investors pounce on them,” said Philip Greenblatt, portfolio manager at Easterly Investment Partners, according to “MarketWatch”. the economic data.
Trump is now officially US President
But with Donald Trump’s return to the White House, the cards are being reshuffled. The Republican, who has now officially been the 47th US President since January 20, 2025, is planning far-reaching changes in economic policy, from which small caps should also benefit greatly. He has already set up a new authority by decree called the “Department of Government Efficiency” (DOGE), which is headed jointly by the Tesla boss Elon Musk and the venture capitalist Vivek Ramaswamy and whose main goal is to reduce bureaucracy. In addition, Trump also intends to further reduce taxes for companies. The tax rate could be reduced to 15 percent, after it had already fallen to 21 percent in his first term in office.
The 78-year-old also wants to protect the domestic economy and, in line with his “America First” strategy, has already announced the introduction of tariffs of 25 percent on products from Canada and Mexico, which are due to come into force on February 1st. And China and Europe also have to worry.
According to MarketWatch, in conjunction with Trump’s protectionist measures, small-cap stocks are widely expected to benefit from the so-called “reshoring” renaissance, meaning companies are rehabilitating their supply chains and bringing manufacturing jobs back to the United States. The return of manufacturing could “disproportionately” benefit smaller companies because they generate most of their revenue domestically, as opposed to megacap firms that have much more international exposure, explained Gregory Spiegel, portfolio manager in Neuberger’s small-cap team Berman told MarketWatch.
The expert is optimistic that the new Trump administration’s policy agenda will allow smaller companies to “make more appropriate capital allocation decisions” when it comes to where to invest and expand their production capacity, and that this will increase their profits and will continue to support cash flows.
Editorial team finanzen.net
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