By JE Insights, Benzinga
DETROIT, MICHIGAN - April 15, 2025 (NEWMEDIAWIRE) - Earlier this year, investors pushed out the likelihood of the Federal Reserve cutting the benchmark interest rate in June - if at all. Fundamentally, the pensiveness centered on the state of payroll data and inflation. However, with inflation fears escalating, the narrative regarding a more dovish Fed policy has heightened. Now, more traders are anticipating that the first round of rate cuts could occur beginning in June.
This dynamic presents some challenges for investors. When interest rates fall, the extra yield - known as the spread - that riskier bonds offer over safer alternatives gets smaller or compressed. Subsequently, the reward for incurring this extra risk can become less attractive, making it difficult for investors to find attractive income without putting their money in excess danger.
It raises the question: where can investors find yield without overreaching in the risk department or, just as unfavorably, sacrificing growth potential?
Financial services provider Infrastructure Capital Advisors - aims to fill this opportunity zone with its exchange-traded fund called the InfraCap Small Cap Income ETF (ARCA: SCAP). Thanks to targeted, high-income strategies within the small-capitalization equities segment, SCAP focuses on a balanced approach for investors navigating complex waters.
The Yield Dilemma
Due to the underlying productivity enhancement of innovations such as artificial intelligence, technology specialists have dominated the equities market. Not only that, analysts anticipate continued growth for certain promising enterprises. At the same time, the blistering performance has sparked the yield dilemma.
Presently, the benchmark S&P 500 features a dividend yield of just 1.27%. This modest figure is largely a consequence of math. Since the yield is obtained by annual dividends per share by the stock price, a higher equity value combined with static payouts leads to declining yields. Plus, with many tech juggernauts paying small dividends (if at all), their weighting contributes to a dilution of the overall index’s yield.
In prior cycles, BBB investment-grade corporate yield represented the sweet spot for income-seeking investors. Currently, this yield comes in at 5.41%, which in context now appears inadequate. Amid a corrective spell for many tech firms along with rising fears of a recession, many market participants simply want more for their risk capital.
This difficult juncture is where the SCAP ETF steps into the picture. An actively managed fund, the SCAP is spearheaded by Infrastructure Capital founder, CEO and portfolio manager Jay D. Hatfield. Hatfield commands a broad perspective on the U.S. financial markets, leveraging years of experience as an investment banker and research director. Most pertinently, his experience with companies that own real or hard assets - such as energy infrastructure and real estate - imbues the SCAP strategy with greater depth, particularly in the realm of monetary policy impacts. As circumstances potentially become more convoluted, the underlying direction of this small-cap-focused ETF could intrigue certain investors.
Going Big By Thinking Small
Perhaps one of the most conspicuous ironies is that large-scale events such as the Fed implementing a dovish monetary policy may spark the biggest impact on the smallest enterprises. At the same time, this dynamic shouldn’t be all that surprising. After all, small businesses represent a primary engine of the U.S. economy.
When it comes to investment ideas, this framework becomes even more pertinent. Historically, small caps have outperformed larger businesses during early rate-cut cycles. This assessment rings particularly true when policymakers attempt to engineer a so-called soft landing.
Yes, rate cuts reduce financing costs and, as a result, help stimulate growth; these attributes do not represent exclusive tailwinds for small businesses. Nevertheless, diminutive businesses, and especially startup enterprises, often rely more heavily on debt for growth. Therefore, when the Fed cuts rates, the impact of the reduced borrowing costs tends to be more positively felt by less financially robust entities.
Furthermore, small caps tend to have a higher sensitivity to the domestic economy. With more companies in this category generating most of their revenue in the domestic market, improving local conditions can provide a more noticeable lifeline.
It also helps that small businesses tend to be less exposed to global trade tensions. While modern intricate supply chains mean that very few (if any) sectors are perfectly immune to geopolitics, by logical deduction, smaller entities usually stamp their biggest footprints at home. Under the context of monetary policy, then, investors may be better served thinking small to go big.
SCAP ETF: An Active Approach
In an effort to effectively negotiate the current tricky waters, some investors may want more than just a basket of securities. This is one of the core reasons why the SCAP ETF is relevant. As an actively managed fund, the SCAP offers more flexibility than passive ETFs. Because portfolio managers are actively guiding the underlying holdings, the fund aims to adjust to dynamic conditions in real time.
As a result, the SCAP doesn’t merely follow a benchmark index, thus making the performance beholden to front-page headlines. Instead, Hatfield and his team at Infrastructure Capital aim to front-run narratives, positioning their clients on elevated ground in a bid to extract income while also simultaneously seeking capital appreciation.
To accomplish the above directive, the SCAP doesn’t just include companies with high yields. Instead, the active ETF targets not only robust passive income potential but also enterprises with strong cash flow profiles. According to the fund’s website, at least 80% of the SCAP’s net assets are allocated across a diversified portfolio of small-cap securities. At the time of writing, the 30-day SEC yield stands at 6.98%.
Beyond the active management and the income potential, the SCAP enjoys a reputational tailwind by association. One of Infrastructure Capital’s flagship funds is the Virtus InfraCap US Preferred Stock ETF (ARCA: PFFA), an actively managed ETF that delivers elevated yields through exposure to preferred stocks of U.S. companies. As of this moment, PFFA ranks among Infrastructure Capital’s most popular products, demonstrating its relevance during this challenging economic cycle, the company says.
Navigating Market Contradictions
In a market awash with contradictions - soaring valuations, shrinking yields and mounting macro uncertainty - it’s becoming increasingly difficult to find investments that offer both income and resilience. Yet that’s exactly the niche Infrastructure Capital seems determined to fill. By going deep into small-cap territory with a deliberate income-first strategy, the Small Cap Income ETF attempts to carve out a more balanced pathway forward.
Ultimately, what sets this approach apart isn’t just the yield - it’s the flexibility. With an active mandate and a manager steeped in navigating complex cycles, the fund aims to provide a framework that adapts to dynamic conditions rather than merely reacting. For those looking to sidestep the binary choice between growth and protection, it may be worth exploring what this small-cap strategy brings to the table.
Featured photo by Tung Lam from Pixabay.
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This content was originally published on Benzinga. Read further disclosures here.
