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A U.S. senator has added small cap stock ETFs to his portfolio ahead of a potential Federal Reserve rate hike. Here's why the timing matters.
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Following the Federal Reserve's 25 basis point rate increase in September 2026, alternative energy companies face headwinds from higher financing costs. However, three companies—Montauk Renewables, Constellation Energy, and TXNM Energy—demonstrate strong fundamentals with solid interest coverage ratios and significant earnings growth projected for 2026, positioning them to weather the higher rate environment.
Morgan Stanley analyst David Arcaro maintains Constellation Energy (NASDAQ:CEG) with a Overweight and raises the price target from $364 to $369.
Constellation Energy and Vistra are both capitalizing on AI-driven electricity demand, with stocks up 137% and 330% respectively over three years. Constellation focuses on nuclear power (22 GW capacity), while Vistra is more diversified with natural gas (62% of capacity) and smaller nuclear operations (15%). The analyst recommends Vistra as the better buy due to its lower valuation (9x 2026 EBITDA vs. Constellation's 21x P/E), greater diversification, and stronger exposure to natural gas, which powers most U.S. data centers.
The Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC) is reviewed as a reasonable option for investors seeking small-cap exposure with a smart beta strategy. The fund has gained 16.84% year-to-date and 18.48% over the past year, with a 0.20% expense ratio. However, cheaper alternatives like iShares Core S&P Small-Cap ETF (IJR) with a 0.06% expense ratio are available for cost-conscious investors.
The First Trust Small Cap Core AlphaDEX ETF (FYX) is reviewed as a reasonable smart beta option for small-cap investors seeking to outperform the market. With $1.38 billion in assets, a 0.58% expense ratio, and strong year-to-date returns of 23.47%, FYX offers diversified exposure across 526 holdings. However, cheaper alternatives like Vanguard Morningstar Small-Cap ETF (VB) and iShares Core S&P Small-Cap ETF (IJR) are highlighted as lower-cost options for investors prioritizing expense ratios.
Surging energy prices and rising yields stall market broadening, forcing a return to mega-cap tech and semiconductor dominance.