Small cap stocks are poised for a strong rally, according to Kevin Dreyer, co-CIO of Value at Gabelli Funds.

In a recent CNBC interview, Dreyer, who oversees the Gabelli Asset Fund (GABAX), emphasized that small caps have "a long room to run" and are increasingly becoming an attractive option for investors looking to diversify their portfolios.

From Large Caps To Small Caps: The Shift Began In Early July

Dreyer noted that while growth stocks have dominated the markets for some time, a shift began to emerge in early July.

"We are long-time value investors, and growth has really led the markets for some time now. But we started to see this rotation in early July," Dreyer explained.

This change is closely tied to recent actions by the Federal Reserve, which will soon start cutting interest rates. "Now this was in line with what we all are seeing now — the Fed finally cutting rates, and we're seeing small-caps and value start to do better."

Read Also: Small Caps Set To 'Lead Their Large Cap Brothers' For Rest Of 2024, Says Market Strategist

Small Caps: Trading At 'Massive Discount' To Large Cap Counterparts

The renewed interest in small caps comes as they are trading at a substantial discount compared to their large-cap counterparts.

"Right now, they trade at a massive discount to their large-cap peers," Dreyer highlighted, suggesting that this could be an ideal time for investors to consider adding small caps to their portfolios.

Dreyer's optimistic view is also supported by the recent performance of the Russell 2000, a key index for small-cap stocks, which seems on track to close higher. Popular ETFs tracking the index closely include the iShares Russell 2000 ETF (NYSE:IWM), the Vanguard Russell 2000 ETF (NYSE:VTWO) and the Avantis U.S Small Cap Equity ETF (NYSE:AVSC).

Though they don't track the Russell 2000 index, the iShares Core S&P Small-Cap ETF (NYSE:IJR) and the Vanguard Small Cap ETF (NYSE:VB) are other popular ways to get investment exposure to small-cap equity.

Small Caps Still Have A 'Long Way To Go'

"By and large, we've been buying more small caps lately, and we think they've got a long way to go," Dreyer added, indicating that the current market environment could present a lucrative opportunity for those looking to capitalize on undervalued assets.

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