After the sell-off in small-capitalization stocks, investors are returning to the asset category, with small-cap exchange traded funds attracting huge inflows.
The iShares Russell 2000 ETF (NYSEArca: IWM) rose 1.0% Monday and is re-testing its 200-day simple moving average after falling 7.7% from its early March highs.
The Russell 2000 Index, the underlying benchmark for IWM, dipped 3.3% over the past week, and is off 8.1% from its record in March. [Small-Cap ETFs Falter]
Despite the continued selling last week, IWM attracted $1.4 billion in net inflows, according to ETF.com data, revealing that some bargain hunters are jumping back in. According to Lipper data, the weekly inflows into IWM in the week ended May 14 were the highest in dollar terms in four years.
Tom Carter, managing director at brokerage JonesTrading, points out that investors are warming up to smaller companies now that they are more attractively priced, reports Dan Strumpf for the Wall Street Journal.
“The selling just got overdone,” Carter said.
Supporting the small-cap category, some argue that acquisitions and deals could further support smaller companies as large companies mull over ideas for their cash hoards.
“Growth in small-cap business is still intact, and they will continue to do well,” Gary Bradshaw, portfolio manager at Hodges Capital Management, said in a Fiscal Times article. “Large-caps are flush with cash, and we think there’s going to be a lot of acquisitions out of small-caps.”
Investors are moving back to the small-cap category after high valuations and a sell-off in growth stocks dragged down smaller companies. The Russell index showed a forward price-to-earnings ratio of 24 at the end of 2013 while the S&P 500 P/E ratio was 15.7, the largest difference since at least 1978, according to Citi data. [Small-Cap Conundrum]
Currently, the Russell has a forward P/E of 19.2, compared to the S&P 500’s 16.7, according to Morningstar data.
iShares Russell 2000 ETF
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article.