In what could be a sign of risk appetite being renewed, small caps are making a comeback as highlighted by the iShares Russell 2000 ETF (NYSEArca: IWM) climbing 4.8% over the past month. Importantly, technical indicators suggest small caps could have more fuel with which to continue leading broader indexes higher.
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.
Related: ETFs In 2016: Large Cap vs. Small Cap
Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.
“The same rotation trend has continued amid the bounce off of the May lows of a few weeks ago. Among the leaders during this current bounce have been small-cap stocks (riding a nice Russell 2000 Index rally). However, they are currently up against a stiff test of resistance as today’s Chart Of The Day of the Russell 2000 Small-Cap Index (RUT) reveals,” according to See It Market.
[related_stories]The lower reliance on multinational sales has also supported mid-caps. Additionally, the mid-cap segment has provided favorable acquisition targets when cash-heavy large-cap companies are shopping around.
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).
EQWS takes an equal-weight position on the Russell 2000. Compared to the benchmark Russell 2000, the equal-weight methodology has a much lower financial tilt at 10.9% and smaller information technology position at 13.3%. The indexing methodology also makes the fund overweight micro-caps at 62.7% of the portfolio.
SCHA tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, which also includes some mid-cap and fewer micro-cap stocks than in the Russell 2000. The Schwab offering is also the cheapest on the block, with a 0.08% expense ratio.
Related: Small- and Mid-Cap Dividend Growing ETF Opportunities
“On the other side of that coin, though, is opportunity – should the RUT break through the 1160-1164 area. That development would open up further – potentially significant – upside. On a preliminary basis, the index may be in the process of doing just that as a late-day rally saw the RUT accelerate to the upside upon breaking above 1164. It was able to close the day at 1170.58,” adds See It Market.
iShares Russell 2000 ETF
Tom Lydon’s clients own shares of IWM.