In short: The long leg of the small-cap pair, chosen on index construction. "By comparison, less than 7% of the S&P 500 is unprofitable… The S&P Small Cap 600 has an explicit positive earnings screen keeping its unprofitable share around 20%. So if you want small cap exposure, you should buy the S&P Small Cap 600 index over the IWM and short the IWM." The report names the vehicle: "Structurally favor the S&P SmallCap 600 over the Russell 2000 (via long IJR / short IWM)." (The call names the index, not the ETF; IJR is the report's expression.)
There are two popular ways to buy "small US companies" through one fund: the Russell 2000 (the IWM fund) and the S&P SmallCap 600 (the IJR fund). They sound interchangeable. They are not, because of how each decides who gets in.
The Russell simply takes the next 2,000 companies by size, profitable or not — and today 40-45% of them lose money. The S&P 600 has a rule that companies must have positive earnings to be added, so only about 20% of its members are unprofitable. When interest rates rise, the loss-making, heavily indebted companies get hurt first, because much of their borrowing is at floating rates that reset immediately.
So Singh's instruction is to hold the S&P 600 if you want small-company exposure, and bet against the Russell 2000 alongside it. The pair makes money if the unprofitable, debt-laden small caps do worse than the profitable ones — which is what he expects if the Fed raises rates.
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