Small-Cap ETFs Are Taking the Lead

After underperforming over the past few years, small capitalization stocks and related exchange traded funds are outpacing their larger peers.

Over the past three months, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which follows the S&P SmallCap 600 Index, gained 6.6%. The Vanguard Small Cap ETF (NYSEArca: VB), which tracks the the CRSP US Small Cap Index, rose 6.2%. The iShares Russell 2000 ETF (NYSEArca: IWM), which reflects the benchmark Russell 2000 Index, increased 6.7%.

Meanwhile, the S&P MidCap 400 Index was up 5.7% and the S&P 500 Index was 4.4% higher over the past three months.


Supporting the recent move in the small-caps segment, the broad equities market has made a robust rally off its February lows and now expectations for future earnings are on the rise.

As the broad equities market pushes toward new highs, riskier assets like small-caps have been able to rally back much quicker. When the economy is doing well and the markets rally, we see sentiment for more nimble smaller companies improve and outperform those of their more languorous, larger peers.

Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.