Investors are dumping small-capitalization stock exchange traded funds, with large money managers taking their most bearish stance on the asset class category since 2004.
Over the past month, the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the Russell 2000 Index, saw $2.4 billion in outflows and iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which follows the S&P 600 Index, saw $272.7 million in outflows, according to ETF.com data.
Meanwhile, large speculators, like hedge funds, have taken $2.8 billion in shorts on the Russell 2000 this month, the most since 2012 and the highest compared to the average levels since 2004, betting that the index will decline, reports Alexis Xydias for Bloomberg.
Investors are taking a more bearish stance on smaller companies after valuations in the Russell 2000 rose above levels seen in the 1990s technology bubble.
“Small-cap stocks are the most expensive I’ve ever seen them, and I’ve been doing this for 20 years,” Eric Cinnamond, manager of Aston/River Road Independent Value Fund, said in the article. “There’s a lot of junk in the Russell 2000. (RTY) If you’re a hedge fund, you’re seeing people starting to sell things like Netflix and Facebook and the biotechs, and a nice way to sell risk is to sell the Russell 2000.”
IWM’s portfolio shows a P/E ratio of 19.3 and IJR has a P/E ratio of 20.5, according to Morningstar data. In comparison, the S&P 500 Index shows a P/E of 16.6.
“You get to a point where the valuation in small caps can get so high relative to large caps that the growth advantage is fully priced in,” Kevin Caron, a market strategist at Stifel Nicolaus & Co., said in the article. “We may be pushing up against that limit.”