As the Federal Reserve signals further interest rate increases to combat persistent inflation, investors are reassessing their exposure to rate-sensitive sectors like technology and real estate. Both are widely considered richly valued, 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, 2026, according to the source. The S&P SmallCap 600 has risen nearly 15% over the same period. Industrial, financial, and energy sectors account for most of the investor interest. Past performance does not guarantee future results, and investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
Small-cap stocks are not only a way to build a portfolio; they can also generate income. Some dividend-paying small-caps may offer yields that outshine large-cap stocks, providing a rare combination of regular dividend income and growth potential. That income can buffer against market swings and provide cash flow for reinvestment. However, finding companies with reliable cash flow and growth requires experienced management. The Infrastructure Capital Small Cap Income ETF (NYSE: SCAP) aims to fill that need.
SCAP is an actively managed fund seeking above-average yield by investing at least 80% of its net assets in an income-oriented portfolio of small-cap stocks. It is run by Infrastructure Capital Founder, CEO, and Portfolio Manager Jay D. Hatfield, who has nearly thirty years of experience in financial markets. His background as an investment banker, portfolio manager, and research director brings a seasoned approach to small-cap, income-paying stocks. The fund targets above-average yield through small-cap stocks and the use of convertible and preferred securities, with a diverse basket of sectors including aerospace and defense, homebuilding, casinos and gaming, regional banks, and mortgage REITs.
When selecting companies, Hatfield 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%, meaning the portfolio generated an annualized net yield of 4.08% strictly from underlying dividends and interest earned over that period. The ETF will also seek enhanced yield by writing index and single-stock options that reflect its own company price targets. Because the fund is actively managed, Hatfield and his team maintain relationships with issuer management teams to determine earnings estimates and forward-looking outlooks.
Ultimately, SCAP offers investors the opportunity to gain exposure to companies earlier in their growth cycle with potential for upside relative to market expectations, given there is less research coverage of them. With interest rates possibly rising and volatility here to stay, tech may not be the only place investors can find growth. Small-cap stocks, particularly quality ones paying income, can be particularly attractive. This content was originally published on Benzinga. Read further disclosures here.
