The surge in long-term Treasury yields is creating a growing challenge for small- and mid-cap stocks, according to JPMorgan, but the bank argues the problem is not simply higher-for-longer Federal Reserve rates.
In its latest SMid View report, JPMorgan said the traditional drivers of 30-year Treasury yields — short-term interest rates, inflation and real GDP growth — have failed to explain the rise since 2023. Historically, those factors explained about one-third of moves in 30-year yields, while the Fed funds rate alone had a 42.7% correlation with the 30-year yield.
But JPMorgan’s regression predicted the 30-year yield would fall in both 2024 and 2025, when it actually rose. For 2026 year-to-date, the model predicted a 5.15% yield versus an actual 5.64%, explaining only 38% of the move.
Instead, JPMorgan points to a sharp rise in the term premium. The spread between the 30-year Treasury yield and the Fed funds rate has doubled to 1.42% from 0.73%, a level historically seen only after the Fed funds rate fell by more than 70%— something the strategists say is unlikely now.
Small-Cap Stocks Are Losing Their Yield Advantage
That matters because the income advantage SMid stocks traditionally offered is disappearing.
JPMorgan found that the percentage of U.S. SMid stocks offering a dividend yield above the 30-year Treasury has fallen from 19% at the end of 2023 to just 9%, the lowest level since 2002. The bank says similar deterioration is visible in the U.K. and continental Europe, and that declines in this measure have historically coincided with slower 12-month forward returns.
What Does This Mean for ETFs?
The JPMorgan research does not specifically recommend any ETF. But its analysis puts dividend-focused small- and mid-cap funds under the microscope.
For example, the WisdomTree U.S. SmallCap Dividend Fund (NYSE:DES) currently has a 3.76% distribution yield, while the ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV) has a 2.32% 12-month yield.
The gap is even thinner for mid-cap value. Vanguard Mid-Cap Value ETF (NYSE:VOE) has a 1.98% dividend yield, while SPDR S&P 400 Mid Cap Value ETF (NYSE:MDYV) has a 1.75% fund dividend yield.
With the 30-year Treasury at 5.64% in JPMorgan’s latest model, none of these funds currently offer a dividend yield close to the long-term government bond.
That doesn’t automatically make these ETFs unattractive. Their total returns can come from earnings growth and capital appreciation, not just dividends. But it does weaken one traditional reason for holding income-oriented SMid equities.
Bottom line
JPMorgan’s message is broader than an ETF call: "these are not the 1990s." Back then, the dollar was rising, real GDP growth was stronger and 30-year yields were falling.
For ETF investors, the implication is clear: as long-term yields stay elevated, the dividend yield versus Treasury yield becomes an increasingly important metric when assessing small- and mid-cap funds.
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