Small-capitalization stocks and related exchange traded funds are experiencing a great run, one that may still have legs.
Among the best performing small cap ETFs of 2021, the Ballast Small/Midcap ETF (NYSE: MGMT) has increased 33.5% and the Avantis U.S. Small Cap Value ETF (AVUV) has advanced 31.3%. Meanwhile, the iShares Russell 2000 ETF (IWM), which tracks the benchmark Russell 2000, has gained 15.6% so far this year.
The Russell 2000 index finished June on its ninth consecutive month of gains, its longest monthly winning streak since at least December 1986, the Wall Street Journal reports.
The small cap benchmark has gained 51% since the end of September 2020, when Covid-19 vaccine trials helped fuel optimism over an eventual return to normalcy. In comparison, the S&P 500 benchmark of large cap U.S. companies rose 29% over the same period.
Smaller companies that benefit from the domestic economic recovery as customers went back to shopping and dining out have helped lift the small cap index to new highs.
The Russell 2000 includes the same sectors as its large cap counterpart, the S&P 500, but is tilted toward several segments that tend to be more sensitive to the economy, including financial and industrial companies.
As the U.S. economy maintains its path toward recovery, analysts project the dramatic recovery will help fuel the profits of smaller companies. Analysts anticipate Russell 2000 companies to report earnings that could have more than tripled over the second quarter year-over-year, according to Refinitiv data. This may not come as a surprise since many of these companies struggled in Q2 2020 when the economy was in shutdown mode. Meanwhile, S&P 500 earnings are projected to increase by about 65%.
“We think that the next patch is better earnings growth,” Nancy Prial, co-chief executive and senior portfolio manager at Essex Investment Management, told the WSJ. “That would lead to surpassing the old highs and continuing with this small-cap outperformance cycle.”
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