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.
Still, investors have not been apprehensive about putting new money to work with small-caps this year.
In addition, analysis from XTF on asset flows into US-listed exchange traded products (ETPs) which track the US small cap equity market show a similar trend. $8.8 billion in net assets flowed into US small cap ETPs in 2016 leading up to the November 8 presidential election. This number increased to $15.3 billion between election day and the end of the year. And in 2017, US small-cap ETP flows have remained strong, with $8.4 billion in net flows through March 14,” according to FTSE Russell.
IWM, which follows the Russell 2000 and is the largest small-cap ETF, is heavily allocated to cyclical sectors. Cyclicals usually perform well as rates rise. Financials, technology and industrial names combine for over half the ETF’s weight.