More attractive valuations in small company stocks relative to their larger counterparts and the U.S. growth outlook are helping small-cap exchange traded funds reach new highs.
The iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 index of small-cap stocks, reached an all-time high Thursday, trading 5.2% higher over the past three months. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) gained 2.8% over the past three months.
After almost $31.5 billion in small-cap withdrawals over the past 14 months, many are eying an opportunity in the asset class category, reports Eric Platt for the Financial Times. For instance, investors funneled $31 million into small-caps over the past week.
Both the S&P 600 Small-Cap Index and Russell 2000 have been keeping up with large-caps so far this year after lagging behind the S&P 500 last year. The iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the SPDR S&P 600 Small Cap ETF (NYSEArca: SLY), which both track the S&P 600 Small-Cap Index, are up 4.6% and 4.3%, respectively, over the past month. IWM has gained 4.6% over the past month while SPY rose 4.2%.
Small-cap valuations now look more attractive, with the S&P 600 trading at about 20.3 times 2015 earnings, below the trailing 20-year average and about 7 points below the level at the start of 2014.
Moreover, after the rally last year, more believe that large-caps are due to slow down. For instance, according to a recent Bank of America Merrill Lynch survey, the proportion of global fund managers who think large-cap stocks will outperform small-caps dipped below two-fifths.
Market watchers also contend that a strengthening the U.S. economy will bolster domestic small-cap companies. Meanwhile, large-cap companies with foreign exposure could see revenue streams diminish due to the impact of currency swings, notably a strong U.S. dollar. [Small-Cap Consumer ETFs Could Outperform]
Morgan Stanley strategists have noted that small-caps offer stronger revenue growth prospects, with the S&P 600 expected to generate sales per share of 6.6%, compared to the less than 0.1% for the S&P 500. UBS also expects earnings growth for smaller companies to be in the low double-digit range, whereas large-caps will likely generate earnings growth in the mid single-digit range.
“Small-cap fundamentals remain solid,” Jeremy Zirin, chief equity strategist at UBS Wealth Management, said in the FT article. “Greater domestic and cyclical exposure, higher interest rates and a stronger dollar should all help drive small- and mid-cap outperformance in the months ahead.”
iShares Russell 2000 ETF
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of SPY.