After one of the worst beginnings to a new year, exchange traded funds that track smaller companies have struggled compared to those that follow bigger names.
“Small-cap stocks continue to struggle relative to their large-cap brethren,” according to Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock. “Part of the challenge is that small caps still remain far from cheap.”
Specifically, Koesterich pointed out that the Russell 2000 Index was trading at over 32x trailing earnings, compared to the less than 17x for the S&P 500.
Moreover, “we are seeing a sharp spike in credit spreads along with a general tightening in financial market conditions,” Koesterich added. “Historically, this has had a more negative impact on riskier segments of the market, such as small caps.”
Year-to-date, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) fell 8.8%, Vanguard Small Cap ETF (NYSEArca: VB) declined 10.7%, iShares Russell 2000 ETF (NYSEArca: IWM) decreased 12.2% and Schwab U.S. Small-Cap ETF (NYSEArca: SCHA) dropped 11.4%.
Meanwhile, the SPDR S&P 500 (NYSEArca: SPY) was down 6.9% so far this year while the iShares Russell 1000 ETF (NYSEArca: IWB) was 7.6% lower, Vanguard Large Cap ETF (NYSEArca: VV) dipped 7.4% and Schwab U.S. Large-Cap ETF (NYSEArca: SCHX) fell 7.5%.