The iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM) are off an average of 2% over just the past week, highlighting the laggard status of smaller stocks against their larger peers to start 2017.
Following Election Day, investors flocked to IWM, IJR and rival small-cap ETFs as markets priced in President Donald Trump’s “America First” mantra that would help domestically-oriented companies led the next leg in economic growth.
Expansionary fiscal policies have fueled inflation expectations, which have in turn raised bets on a Federal Reserve interest rate hike and strengthened the U.S. dollar. Consequently, with a stronger U.S. dollar, large-cap stocks may underperform as many large exporters find it harder to sell goods to foreign markets.
However, the market’s enthusiasm for small-caps has recently waned in dramatic fashion prompting some traders to call for more downside for the group.
“The IWM ETF that tracks the Russell opened Monday trading at $132.76, after peaking at $140.86 at the beginning of March. For Todd Gordon of TradingAnalysis.com, the recent slip is highly significant, as it took the ETF below its recent range of $133 to $135,” reports CNBC. “Currently, he sees the next range of support at the $126 to $128 zone — a prior zone of resistance. That is “a key decision point” on the charts, according to the trader.”
Following Election Day, investors flocked to IWM, IJR and rival small-cap ETFs as markets priced in President Donald Trump’s “America First” mantra that would help domestically-oriented companies led the next leg in economic growth.
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.
While IJR has lost nearly $86 million in assets this month, IWM has seen March inflows of over $2.9 billion.
A smart beta alternative to IJR and IWM is the Guggenheim S&P Smallcap 600 Pure Value ETF (NYSEArca: RZV), which has a heavily cyclical lineup. RZV targets companies that exhibit the value characteristic but focuses on the smaller companies taken from the S&P SmallCap 600 benchmark. Industrial, consumer discretionary and materials stocks combine for 57% of that ETF’s weight.
Tom Lydon’s clients owns shares of IWM.