Look to Small-Cap ETFs for Market Leadership

Investors looking to gauge risk appetite while searching for clues regarding what broader indexes’ next moves could be should consider evaluating small-cap equities and exchange traded funds such as the iShares Russell 2000 ETF (NYSEArca: IWM).

While investors have been favoring large caps and low volatility stocks for the bulk of this year, some important small-cap benchmarks have recently displayed notable technical strength, indicating risk appetite could creep back into the market in the coming weeks.

Related: ETFs In 2016: Large Cap vs. Small Cap

The small-cap segment has been gaining momentum in recent months, jumping on the risk-on sentiment after the Fed stated it would only hike interest rates two times later this year, or downwardly revised from the four hikes it expected back in December. The extended low-rate environment has also been a boon for smaller companies that have capitalized on cheap debt in their balance sheets.


“The Russell 2000 has paced the stock market rally of the mid-May lows, matching the point gain of the S&P 500 (but nearly doubling its percentage gain). Small-caps have not broken out from a longer-term trend perspective, but industry group leadership trends show small-cap groups gaining relative to large-cap groups. This is important to see if the stock market rally is to continue near-term,” according to See It Market.

Other strong small-cap performers include the PowerShares Russell 2000 Equal Weight Portfolio (NYSEArca: EQWS) and the Schwab U.S. Small-Cap ETF (NYSEArca: SCHA).