After solid rebound, what’s next for small-cap real estate stocks?

Real estate stocks rebounded in the second quarter as investors jittery over escalating global trade tensions and the impact of a stronger dollar favored smaller, more domestically focused companies.

The trend began in March, when the Trump administration announced tariffs on imports of steel and aluminum. In response, traders bid up shares in small-cap stocks, driving the Russell 2000 index of smaller companies sharply higher. Small-cap real estate stocks also got a boost.

Small-cap REITs and other smaller-company stocks have given back some of their gains this past month. Some investors may be reconsidering the view that smaller U.S. companies may in fact fare better than larger, multinational companies in the face of tariffs or other obstacles to trade.

Sal Bruno, chief investment officer at IndexIQ, recently talked about IQ’s Real Estate Small Cap ETF and made the case for why small-cap REITs may make another comeback this year. Answers have been edited for clarity and length.

What kinds of companies make up this fund?

The way we’ve constructed our index is to basically take the bottom 10 percent of the U.S.-listed REITs. You don’t get excessive concentration on any individual sectors. That’s a key part of why we’ve seen the volatility be a little bit more in line with the large caps, despite the fact that small caps tend to have a higher volume in general.

What’s the advantage of a fund that focuses on small-cap real estate companies?

Small-cap REITs ETFs have actually outperformed large-caps both in the immediate past and also a longer time period, as well. Typically, you’re taking on more volatility in small caps than you are in large caps, and you hope to get compensated with a return for that extra risk. In this case, it’s actually the best of both worlds, in the sense that (the fund) has gotten better returns at about the same level of risk.