The leadership of small-cap exchange traded funds illustrates the strength of the rally in U.S. stocks and investors’ improved appetite for risk.
ETFs tracking small companies such as iShares Russell 2000 (NYSEArca: IWM) have outperformed the S&P 500 by a wide margin so far in 2012. The small-cap ETF is up 10.1% so far this year, compared with a gain of 5.6% for the blue-chip index, according to Morningstar.
Small-cap stocks often lead during the early stages of a rally, and they generally see wider price swings than shares of large, more established companies.
“Small-cap stocks tend to be more volatile due to narrower economic moats and a greater sensitivity to macroeconomic risks, but with this greater volatility comes a higher beta and the expectation for higher returns,” Morningstar analyst Michael Rawson writes in a profile of the Russell 2000 ETF.