Small-capitalization stocks and related exchange traded funds have been an unloved asset category this year as investors turned to larger, more stable companies during the volatile conditions.
Year-to-date, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) fell 6.1%, Vanguard Small Cap ETF (NYSEArca: VB) declined 8.1%, iShares Russell 2000 ETF (NYSEArca: IWM) decreased 9.8% and Schwab U.S. Small-Cap ETF (NYSEArca: SCHA) dropped 8.7%.
The Russell 2000 has retreated 10% in 2016, and the small-cap index is still in a bear market, falling 21.1% from its record high last summer, reports Adam Samson for the Financial Times.
Dan Suzuki, an equity strategist at BofA Merrill Lynch who oversees the bank’s small-cap research, argues that the current environment is “horrible” for small-caps.
Small-cap stocks, which tend to be lower-quality companies with weaker balance sheets, have fallen out of favor as investors shied away from riskier assets this year. Instead, large-cap stocks were considered safer and better able to weather the recent market swings and U.S. economic slowdown.
“When you’re afraid of markets going down, you move to large-caps,” Pankaj Patel, head of quantitative and small-cap research at Evercore ISI, told the Financial Times.
For instance, the SPDR S&P 500 (NYSEArca: SPY) was down 5.2% so far this year while the iShares Russell 1000 ETF (NYSEArca: IWB) was 5.8% lower, Vanguard Large Cap ETF (NYSEArca: VV) dipped 5.7%, Schwab U.S. Large-Cap ETF (NYSEArca: SCHX) fell 5.7% and SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) was down 5.0%.
Moreover, the widening credit spreads, an indication of growing risk in U.S. corporate debt, have been a bad omen for highly leveraged small-cap companies. The yield premium between junk bonds and Treasuries widened to its highest level since 2009, according to BofA Merrill Lynch data.
The rising yields on junk bonds have been particularly worrisome for the small-cap energy sector, which have taken the biggest hit in the recent selling.
iShares Russell 2000 ETF
Max Chen contributed to this article.