As the Federal Reserve signals further interest rate hikes to combat stubborn inflation and market volatility persists, investors are increasingly moving away from rate-sensitive sectors like technology and real estate. Both sectors are considered richly valued by many measures, prompting a search for alternatives. Small-capitalization stocks are emerging as a compelling option, often outperforming when investors seek bargains and offering growth potential as these companies are earlier in their business cycles. They also tend to receive less attention from Wall Street.
The Russell 2000 Index, composed of 2,000 small-cap U.S. companies, is up 13% year-to-date as of Oct. 5, with industrials, financials and energy driving most of the gains. The S&P SmallCap 600 has risen nearly 15% over the same period, led by the same industries. Past performance does not guarantee future results, and investment return and principal value will fluctuate, so shares may be worth more or less than their original cost when redeemed. Current performance may be lower or higher than the quoted data.
Beyond growth, small-cap stocks can also generate income, with some dividend payers potentially offering yields that outshine large-cap stocks. This combination of regular dividend income and growth potential can provide a buffer against market swings and cash flow for reinvestment. However, identifying reliable cash flow and growth requires careful analysis. The Infrastructure Capital Small Cap Income ETF (NYSE: SCAP) aims to fill that need.
SCAP is an actively managed fund that seeks above-average yield by investing at least 80% of its net assets in an income-oriented portfolio of small-cap stocks. It is managed by Infrastructure Capital Founder, CEO and Portfolio Manager Jay D. Hatfield, who brings nearly thirty years of experience in financial markets, including roles as an investment banker, portfolio manager and research director. Hatfield and his team target above-average yield through small-cap stocks and the use of convertible and preferred securities. The fund offers exposure to a diverse basket of sectors, with concentrations in aerospace and defense, homebuilding, casinos and gaming, regional banks and mortgage REITs.
When selecting companies, the manager uses internal price targets based on the link between earnings growth and price-to-earnings ratios. The team also employs selective option writing strategies and modest leverage to generate additional income while retaining potential upside market exposure. As of the end of June, the 30-day SEC yield was 4.08%, reflecting annualized net yield from underlying dividends and interest. The ETF also seeks enhanced yield by writing index and single-stock options that reflect its own company price targets. Since it is actively managed, Hatfield and his team maintain relationships with issuer management teams to determine earnings estimates and forward-looking outlooks.
For investors, SCAP offers the opportunity to gain exposure to companies earlier in their growth cycle with potential for upside relative to market expectations, given less research coverage. This content was originally published on Benzinga. Read further disclosures here. This post contains sponsored content and was created in collaboration with a third-party partner. Benzinga is a publisher and does not provide personalized investment advice or act as a broker or dealer. This content is for informational purposes only and is not intended to be investing advice or an offer or solicitation to buy or sell any security.
