The iShares Russell 2000 Index (NYSEArca: IWM) and other small-cap ETFs have been outperforming the S&P 500 since the end of April in a sign that investors are taking on more risk.
In fact, the Russell 2000 fund is ahead for 2013 with a gain of 15.4% versus 13.8% for the S&P 500, according to Morningstar data.
“Small-cap stocks are outperforming, while large-cap stocks appear to be going through a phase of profit-taking,” said Craig Johnson, director of technical research at Piper Jaffray, in a note Monday.
Over the past four weeks, stocks with a market cap under $2 billion are outperforming stocks with a market cap of more than $5 billion in industrials, financials, consumer cyclicals, technology and healthcare sectors, he added.
“Small-cap stocks tend to be more volatile due to narrower economic moats, greater sensitivity to macroeconomic risks, and less exposure to faster-growing emerging markets,” according to a Morningstar analyst report on IWM. “With this greater volatility comes a higher beta and the expectation for higher returns.”
The small-cap fund has a 10-year annualized return of 9.5%, versus 7.3% for the S&P 500.
Other small-cap blend ETFs include Vanguard Small Cap (NYSEArca: VB), Schwab U.S. Small-Cap (NYSEArca: SCHA), SPDR S&P 600 Small Cap (NYSEArca: SLY) and iShares Core S&P Small-Cap ETF (NYSEArca: IJR).
The chart below shows the relative performance of IWM versus the S&P 500.
Full disclosure: Tom Lydon’s clients own IWM and SCHA.