Marquee small-cap exchange traded funds, including the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM), have been widely highlighted as laggards among equity ETFs this year.
On a year-to-date basis, investors in S&P 500-tracking ETFs are enjoying returns of nearly 8% while IWM and IJR are higher by just 2.2% and 0.3%, respectively. Some investors are getting impatient with small-cap ETFs and are departing some of these products in significant fashion.
“Investors pulled $3.5 billion from the biggest exchange-traded fund that tracks the Russell 2000 Index last week, spooked by the steepest selloff in the domestically focused stocks since before Donald Trump’s surprise election win,” reports Dani Burger for Bloomberg.
The aforementioned IWM is the biggest ETF tracking the widely followed Russell 2000 Index. 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.
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.
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.
Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies. However, the dollar is sagging this year and the Federal Reserve could be forced to hold off on more rate hikes, scenarios that are pressuring small-caps.
“The small-cap index tends to react to nerves more than the S&P 500 Index — it’s less liquid and more directly impacted by the U.S. economy and the performance of the dollar, which sits at the lowest level since November compared with a basket of major peers. While the S&P 500 hovers just 0.2 percent below its record, the Russell 2000 is on track for its worst four-week stretch in seven months,” according to Bloomberg.
For the week ended May 23rd, IWM bled $2.4 billion in assets, more than any other ETF over that period. Year-to-date, investors have pulled $3.9 billion from IWM, a total surpassed by just one other ETF.
Tom Lydon’s clients own shares of IWM.