The iShares Russell 2000 ETF (NYSEArca: IWM) is up 3.7% year-to-date, but the largest exchange traded fund tracking smaller stocks is slightly lower over the past month. That does not mean investors should shy away from IWM and other small-cap ETFs.
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
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.
[related_stories]“The Russell 2000 ETF (NYSEARCA:IWM) is working on a bullish, complex, inverse head-and-shoulders pattern. Price needs a strong break above 118.54 to complete (and confirm) the formation. The weekly momentum indicator is bullish. Note that if the Russell 2000 does breakout, it would target 140’s based on the size of the base,” 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).
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.
Related: Slow-and-Steady ETFs for a Volatile Market
The small-cap segment has been gaining momentum in recent months, jumping on the risk-on sentiment as market participants are increasingly believing the Fed may not raise rates at all this year. The extended low-rate environment has also been a boon for smaller companies that have capitalized on cheap debt in their balance sheets.
“A bullish confirmation of the head and shoulders pattern (i.e. breakout above the neckline) would have broad implications for the stock market. It would likely coincide with a breakout of the S&P 500 Index to new highs (thus confirming the next wave higher of this bull market). On the flip side, a failure at the neckline resistance would likely slow the bullish advance,” according to See It Market.
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iShares Russell 2000 ETF
Tom Lydon’s cliens own shares of IWM.