Major small-cap benchmarks, such as the Russell 2000 and the S&P SmallCap 600 Index, have struggled in recent weeks, but the declines recently experienced by smaller stocks could be setting the group to rally into year end.
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, had been solid performers until recent weeks, but Election Day jitters and concerns about the Federal Reserve’s monetary policy may be behind the recent declines seen by small caps.
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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.
“But these recent losses could be indicative of a secular bull market akin to that of the early 1980s through 2000, according to one technical analyst who sees a familiar pattern in the charts going back more than 30 years,” according to CNBC.
[related_stories]“”I think there’s just some nervousness heading into the election, but if we back up really since most of this year, small caps have been doing quite well, and within a pretty placid market over the past few months,” Eddy Elfenbein, editor of the Crossing Wall Street blog, said in an interview with CNBC.
IWM and IJR have large weights to financial services and healthcare stocks, explaining why the small-cap ETFs are lagging the S&P 500 this year.
For more information on the small-cap segment, visit our small-cap category.
iShares Core S&P Small-Cap ETF
Tom Lydon’s clients own shares of IWM.