Think Small in a Trade War? Yes, but Think Carefully, Too

As trade tensions escalate, investors are flocking to stocks of smaller US companies, which rely less on foreign sales than their large-cap peers. But in some industries, tariffs could affect smaller companies in unexpected ways.

Small- and mid-cap (SMID) stocks are widely seen as a good place to be when countries unleash tariffs on one another. Investors have embraced this conventional wisdom with gusto, pushing the Russell 2500 Index of US small- and mid-caps up 5.5% in 2018, compared to 2.7% for the S&P 500 through June 30. (Display)

Assessing International Exposure

However, as with most pieces of conventional wisdom, the reality is a bit more complicated. It’s true that smaller-cap stocks offer many more opportunities to find US-focused companies than do the diversified multinationals that make up the large-cap universe. Just 38% of firms in the Russell 2500 rely on overseas buyers for more than 10% of their sales, compared to 66% of S&P 500 companies (Display).