The S&P 500 and Dow Jones Industrial Average may be breaking to new all-time highs, but small-capitalization stocks and related exchange traded funds have been recently leading the charge.
The iShares Russell 2000 ETF (NYSEArca: IWM) has increased 8.0% over the past three months, with the Russell 2000 index briefly climbing over its previous closing record on Christmas eve. In comparison, the S&P 500 was up 5.6% over the past three months while the Dow was 6.3% higher.
After a slow start, the Russell 2000 Index of small-cap stocks has revealed strength in the second half of the year, recovering from a correction that pushed the index down 11% over a five-week period that started in early September, Bloomberg reports. The index has jumped 15% since the one-year low on October 13.
Traders are anticipating good things for small-caps in the new year, betting on another January Effect seasonal tailwind and lower gas prices to help smaller companies outperform their larger counterpart, reports John Melloy for CNBC.
The so-called January Effect refers to investors’ dumping small-cap stocks at the end the year to capitalize on tax losses but the same area sees heavy buying in the new year. As the trend grew in popularity, the effect has popped up as early as December with small-caps leading even before the start of the new year.
“After a year of consolidation, the setup on the RTY (Russell 2000) looks much more attractive to us than at any point in the last six-nine months,” Jonathan Krinsky, chief market technician for MKM Partners, said in the CNBC article, projecting a 12% to 13% rally in the small-cap index.
Krinsky also expects the outperformance among smaller stocks to continue through the first three months of the new calendar year. [Small-Cap ETFs to Shine in 2015]
Looking at the fundamentals, investors point to three factors that will help small-caps ahead. For starters, small-caps generate the majority of revenue domestically, so low gas prices will translate to a nice boost in U.S. spending. A strong U.S. dollar will weigh on large-cap stocks with heavy international exposure. Lastly, slowing growth in China and Europe could weigh on large U.S. exporters.
iShares Russell 2000 ETF
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of IWM.