Every bear market comes to an end, or at least it has so far.

Of course, no one knows exactly when that will be so there are bound to be a few false starts. In this case, just as the Fed appeared to be temporizing on rate increases, Chairman Powell weighed in following the November meeting and pulled the rug out from a nascent market rally. Bloomberg economists are predicting an end rate for Fed funds of better than 5.0%, well above the current 4.0% (Bloomberg, Oct. 28).

But given that we started with Fed funds around zero we’re likely closer to the end of this cycle of tightening than to the beginning. The latest CPI numbers (up 7.7%, down from 8.2% the month before) and the subsequent jump in stock prices suggest as much (New York Times, Nov. 10). Assuming that’s the case, investors should begin to look through the daily headlines to a period when rates stop moving up and markets recover. They can then start to position their portfolios accordingly.

Data has shown that small cap stocks tend to lead following a period of economic dislocation. With their more domestic business focus, they have also done well in times of a rising dollar. Current conditions check both of those boxes: the economy has been under stress and the dollar has soared for much of this year. While the past is not always prologue, small caps have outperformed large caps following nearly every bear market of the last century.

Using the S&P Small Cap 600 as a proxy and comparing returns to the S&P 500, you can see how this has played out following the last three major market downturns starting with the Dot Com crisis. From October 2002 to October 2005, the S&P Small Cap 600 returned 22.04% on a compound annual basis. The S&P 500 was up 17.14% over that same period, an excess return of 4.90% per year for small caps. (Source: FactSet)

The effect was even more pronounced following the Global Financial Crisis. For the period March 9, 2009 through March 9, 2012, the S&P Small Cap 600 rose at an annual compounded rate of 37.22% compared to 29.20% for the S&P 500. Here the excess return for small caps was 8.02%, compounded annually. Finally, there was the post-Covid market, defined as the period March 23, 2020 through October 20, 2022. Here the S&P Small Cap 600 was up 29.43%, compounded annually. The S&P 500 was up 23.40% for the same period, an excess annualized return of 6.14% per year for the small cap index. (Source: FactSet)

The IQ Chaikin U.S. Small Cap ETF (NYSE: CSML) is one way to gain broad exposure to the universe of small cap stocks. CSML uses a multi-factor approach to security selection that focuses on value, earnings growth, sentiment, and selected technical indicators. It generally holds 200-350 securities, equally weighted, selected from the Nasdaq US 1500 Index.

Diversification across asset classes and market capitalizations is generally a good idea for most investors, and that includes an allocation to small cap equities. Although we do not have a crystal ball to know when the market will find firmer footing, if history is any guide, the period following the end of a market downturn might be an especially good time to have exposure to the small cap sector.

Moreover, through its multi-factor methodology, CSML offers the added benefit of reduced single factor sensitivities while preserving outperformance potential. The merits of this approach have been demonstrated most recently during the post-COVID period, defined as March 23, 2020 through October 31, 2022, during which CSML outperformed the S&P 600 small cap index as well as the value, growth, and momentum factor versions of the S&P 600 index. For those considering establishing or adding to a small cap position, CSML presents a compelling option.

 

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

Diversification cannot assure a profit or protect against loss in a declining market.

Before considering an investment in the Fund, you should understand that you could lose money.

The Underlying Index may not be successful in replicating the performance of its target strategies. The Underlying Index seeks to provide exposure to small-cap equity securities that are expected to outperform peers, based upon a quantitative multi-factor model. There is no guarantee that the construction methodology of the Underlying Index will accurately provide exposure to equity securities that outperform their peers.

Stocks of small-cap companies may be subject to greater price volatility, significantly lower trading volumes, temporary illiquidity, cyclical, static, or moderate growth prospects, and greater spreads between their bid and ask prices than stocks of larger companies. Stock prices of small-capitalization companies may be more volatile than those of larger companies and, therefore, the Fund’s share price may be more volatile than those of funds that invest a larger percentage of their assets in stocks issued by mid-or large-capitalization companies. Stock prices of small capitalization companies are generally more vulnerable than those of mid-or large-capitalization companies to adverse business and economic developments. Securities of small-capitalization companies may be thinly traded, making it difficult for the Fund to buy and sell them. In addition, small-capitalization companies are typically less financially stable than larger, more established companies.

Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The S&P SmallCap 600 Index (S&P 600) covers roughly the small-cap range of American stocks, using a capitalization-weighted index. Capitalization range is from $850 million to $3.7 billion.

The S&P 500® Index is widely regarded as the standard index for measuring large-cap U.S. stock market performance.

The NASDAQ US 1500 Index contains up to the 1500 largest securities in the NASDAQ US Small Cap Index.

The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.

Consider the Funds' investment objectives, risks, charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.com. Read the prospectus carefully before investing.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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