Small-capitalization stocks and related exchange traded funds have been suffered steeper losses their large-cap peers during the worst of the selling.
Over the past month, the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the small-cap-heavy Russell 2000 index, declined 21.5%, compared to the 12.5% pullback for the SPDR S&P 500 ETF (NYSEArca: SPY).
Small-caps have also been weak during the rebounds, further contributing to their underperformance. For instance, for the week ended Tuesday, the S&P 500 returned 6%, whereas the Russell 2000 only gained 4.3%.
Analysts at Bespoke Investment Group argued that the underperformance of small-caps can be partially attributed to the nature of recently enacted fiscal and monetary stimulus measures, MarketWatch reports.
“So far, relief measures passed by Congress and introduced by the Fed are either focused on the investment grade market, small business or attach pretty significant strings to government support,” Bespoke analysts said in a note.
However, investors should note that small-cap stocks are often not considered small businesses, which the government typically defines as those with under 500 employees. Consequently, they don’t have access to funds earmarked for those firms, nor do they have the investment-grade rated debt the Federal Reserve has been buying to stabilize markets.
Furthermore, Philip Lawlor, managing director of global markets research at FTSE Russell, pointed out that the small-cap index is dominated by cyclical sector stocks like banks, which tend to underperform during market downturns and have been particularly weighed down after the Federal Reserve cut interest rates.
“There’s an awareness that what we’re facing is an unprecedented economic paralysis that we’ve not experienced since the Second World War,” Lawlor said told MarketWatch. “This is all feeding into risk aversion,” that will benefit larger companies with lower debt levels in defensive areas of the market.
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