The iShares Russell 2000 (NYSEArca: IWM) has paused to digest its recent gains after the small-cap ETF broke out to record price levels last week. Smaller stocks have led the market higher since the November bottom.

For example, IWM is up 14.6% since its Nov. 16 intraday low, while SPDR S&P 500 (NYSEArca: SPY) has gained 8.3%.

“Since mid-2011, the Russell 2000 has traded in a rather choppy fashion which has helped define its current wedge-shaped trading range,” according to chartoftheday.com. “More recently, the Russell 2000 has started the new year in a positive fashion by both breaking above resistance … and making a new record high.”

When small-cap ETFs are outperforming it’s generally a good sign for the overall market because investors are taking on more risk in the more-volatile segment.

“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. Small-cap stocks have earned a return premium about 2.0% over large-cap stocks since 1926,” investment research firm Morningstar writes in a profile of IWM.

Russell 2000

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

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