Inverse Small-Cap ETFs to Capitalize on Short-Term Weakness | ETF Trends

Small capitalization companies are having a hard time catching up with their large capitalization counterparts, and some even argue that smaller stocks will keep on underperforming. Investors with a pessimistic outlook on the small-cap asset category can utilize inverse exchange traded funds to hedge against further declines.

Oppenheimer Asset Management technician Ari Wald argues that a good short-term strategy would be to short the Russell while going long the S&P 500, reports Patti Domm for CNBC.

“Small caps did well in the last few years,” Domm said in the article. “In the last couple of months, we’ve seen the trend toward big caps.”

Last week, the Russell 2000 experienced its worst weekly performance in two years, and analysts expect more pain ahead. The iShares Russell 2000 ETF (NYSEArca: IWM) declined 3.9% over the past week and is up 0.4% year-to-date. In comparison, the S&P 500 Index dipped 0.9% over the past week and is up 7.6% this year. [Small-Cap ETF Pauses, Waits on New Highs]

“The Russell is the only one of the four major indices that didn’t confirm by closing at a new high,” Paul LaRosa, market technician at Maxim Group., said in the article. “We traded intra-day above the 1212 level but didn’t close above it. That is what I think led to a negative divergence selloff last week.”

Technical analysts are also pointing to potential trend-reversal as small-caps start showing a head and shoulders pattern formation.