An ETF indexed to the Russell 2000 has more than doubled the return of the S&P 500 the past month with small-cap stocks outperforming on increased risk appetite in the market.

The iShares Russell 2000 (NYSEArca: IWM) was leading the SPDR S&P 500 (NYSEArca: SPY) on Wednesday in a continuation of the recent trend. IWM surged 2.6% in a relief rally after U.S. lawmakers reached a last-minute compromise to stop the economy from falling over the fiscal cliff.

IWM, the small-cap fund, is up 6.2% the past month compared with a gain of 2.7% for SPY, the S&P 500 portfolio, according to ETF Screen.

In fact, the Russell 2000 index on Wednesday climbed above its record closing high, of 865.19, which it hit in April 2011, according to The U.S. small-cap benchmark traded over 871 at one point Wednesday.

Bulls like to see small-cap companies outperforming larger blue chips because they are more sensitive to the economy and tend to rally in risk-on markets.

“From a seasonal perspective, this is a good window for small caps,” Kimble Charting Solutions said in a note Wednesday. “With them back at 2007 highs, we have to watch them closely … if they break the old highs, money flows should chase them.”

The chart below show the relative performance of IWM vs. SPY. When the chart is rising, it means small-cap stocks are beating the S&P 500. IWM has outperformed since mid-November.


Full disclosure: Tom Lydon’s clients own SPY and IWM.

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