Small-Cap ETF Strength Augurs Well for Market | ETF Trends

The outperformance of small-cap ETFs such as iShares Russell 2000 (NYSEArca: IWM) is an encouraging sign for the rally as investors take on more risk.

“Strong bull markets tend to be characterized by leadership and outperformance in small-cap stocks as money grows more confident about the future and positions for higher risk with higher return potential,” writes Pension Partners chief investment strategist Michael Gayed at MarketWatch.

“Bull markets do not have to be led by small-cap stocks as evidenced by several years in the 1990s, but powerful moves can result when they are. Clearly the S&P 500 has been the big winner thus far in 2012 as money favored liquidity when taking equity risk, but that appears to be changing,” he added.

The small-cap fund IWM is up 11.2% year to date while the S&P 500 has gained 13.7%, according to Morningstar.