“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,” says Morningstar’s Michael Rawson in a profile of IWM. “For those who want to reap this size premium, be forewarned that the returns for smaller stocks can vary drastically over time, and the premium has reliably appeared only over periods of a decade or more.”
DeSanctis at BofA Merrill Lynch said in months when IWM had the biggest inflows, small-cap active managers underperformed the Russell 2000 by 43 basis points, according to the FT story. In the months when IWM had the biggest outflows, active managers outperformed the benchmark index by 36 basis points.
Yet the analyst said it’s “a little too simplistic” to conclude activity in IWM has a “dramatic impact” on an active manager’s outperformance or underperformance, the newspaper reported.
“This is because IWM’s flows have a very close relationship with the direction of the Russell 2000. In those months when IWM’s inflows were largest, the index rallied about 78% of the time. In the months when IWM’s outflows were bigger, the index retreated 63% of the time,” the FT said.
iShares Russell 2000
