In a recent exclusive interview with Benzinga, Paul Eitelman, chief investment strategist for North America at Russell Investments, provided insights into the sectors of small-cap stocks that stand out amidst economic uncertainty.

While small-caps as a whole face some macroeconomic risks, Eitelman highlights several specific sectors that could offer substantial opportunities.

Where Small-Cap Managers Are Finding Opportunities

Eitelman notes that "dedicated small-cap managers are finding opportunities to tilt their portfolio strategies toward banks, technology and select highly indebted companies that are likely to benefit from lower interest rates going forward." These sectors are positioned to thrive, especially as interest rates begin to decline.

Technology continues to dominate market discussions, and small-cap tech companies could be key beneficiaries of economic shifts, particularly those aligned with innovative growth areas like AI and data services.

The Russell 2000 index is one of the more popular indices tracking small cap U.S. equity. ETFs that track this index include the iShares Russell 2000 ETF (NYSE:IWM), the Vanguard Russell 2000 ETF (NYSE:VTWO) and the Avantis US Small Cap Equity ETF (NYSE:AVSC). The Invesco S&P SmallCap Information Technology ETF (NYSE:PSCT) is a lesser-known but technology-focused ETF tracking small cap companies. The top 3 holdings of this ETF are Fabrinet (NYSE:FN), SPS Commerce, Inc. (NASDAQ:SPSC) and Badger Meter Inc. (NYSE:BMI).

Read Also: Small-Cap AI Stocks On The Rise: 3 Hidden Gems You Shouldn't Miss

Stock Selection: Primary Driver Of Risk, Return

However, Eitelman cautions that given the high macroeconomic uncertainty, broad sector bets are risky. He recommends a more refined approach: "Our preference into high macro uncertainty is to target only modest sector tilts and let stock selection shine as the primary driver of risk and return."

This focus on stock selection over aggressive sector rotation makes sense in an environment where not all companies are equally positioned to navigate fluctuating interest rates or economic slowdowns.

Banks, for example, are likely to benefit from a soft landing scenario, while indebted companies could see relief as rates fall. Tech remains a favorite sector due to its long-term growth prospects, even amid near-term uncertainty.

Overall, Eitelman's strategy emphasizes precision and caution, advising investors to prioritize stock-picking and avoid broad over-exposure in the small-cap space.

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