The iShares Russell 2000 ETF (NYSEArca: IWM), the largest exchange traded fund tracking smaller stocks, and the rival iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which follows the S&P SmallCap 600 Index, are both higher by double digits this year and, in the eyes of some traders, that bodes well for continued upside for other broad market indexes.
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.
Additionally, small-cap ETFs are still attractively priced relative to their larger counterparts.
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 “hit a one-year high on Monday, which Tim Seymour of Triogem Asset Management sees as an encouraging sign for the overall market. For the past couple of weeks, the small-cap index has been outperforming the S&P 500, which opened at an all-time high on Monday morning,” according to CNBC.
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.
SEE MORE: Treading Carefully With Small-Cap ETFs
Reports CNBC: “The Russell move is “indicative of the fact that there’s probably more strength in the consumer than we had thought six months ago,” Seymour said Monday on CNBC’s “Trading Nation.”
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.
For more information on the small-cap segment, visit our small-cap category.
iShares Russell 2000 ETF
Tom Lydon’s clients own shares of IWM.