The popularity of exchange traded funds that invest in U.S. small-cap companies may be having an impact on the market’s less-liquid stocks, and could even be making it more difficult for active managers to outperform the index.
“Active managers have been fighting an uphill battle against the growing influence of ETFs in the U.S. smaller companies sector,” the Financial Times reports Thursday.
“When ETF flows are strong, active managers tend to struggle to get ahead of their benchmarks and when flows are weak, active managers tend to outperform,” said Steven DeSanctis, head of U.S. small cap strategy at Bank of America Merrill Lynch Global Research, in a research paper.
U.S. small-cap ETFs have accounted for nearly 90% of total fund inflows to the sector over the past 10 years, the FT reports. Since 2002, $32.7 billion has flowed into small-cap ETFs.
The largest ETF in the category is the $16.8 billion iShares Russell 2000 (NYSEArca: IWM). The small-cap fund is up 10.6% year to date, compared with an 8.3% gain for the S&P 500, according to Morningstar. The ETF has an expense ratio of 0.26%.
Small-cap shares are more volatile than blue chips and outperform when investors are adding more risk.