U.S. small-cap stocks as measured by the Russell 2000 Index have kept up with the U.S. large-cap segment as measured by the Russell 1000 Index year-to-date and even pulled ahead over the past month and so far into April.
For instance, the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 Index, is outpacing the iShares Russell 1000 ETF (NYSEArca: IWB) by a healthy margin this month.
President Donald Trump has stoked global trade war fears after implementing a tariff on steel and aluminum imports. While larger companies with an international foot print, notably U.S. manufacturers that export finished goods out, have come under fire, most small-cap companies generate most of their revenue from the domestic economy.
“US small cap stocks, as measured by the Russell 2000® Index, continue to outdistance US large caps, as measured by the Russell 1000® Index,” said FTSE Russell in a recent note. “The Russell 2000 has risen 2.9% in April against a rise of 2% for the Russell 1000 Index and has similarly outperformed for the past month and year-to-date. This reverses the prior trend of small cap underperformance.”
Small Stocks, Big Potential
Smaller U.S. companies that have a higher exposure to the U.S. and less exposure abroad in terms of revenue and profit would be more insulated from international trade disputes, which has caused more investors to shift toward the small-cap segment.
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According to FactSet data, Russell 2000 companies generate 79.4% of revenue from the U.S. exposure, whereas 69.7% of the S&P 500’s revenue exposure comes from the U.S.
“Several fundamental factors have driven small cap alpha in 2018. First, the Russell 2000 Index constituents’ 20% international revenue exposure is much lower than large caps’ overseas sales. Being more domestic helps small caps in several ways,” said FTSE Russell Managing Director Alec Young. “Not only have they been less affected by geopolitical and trade fears, they’re also more leveraged to newly enacted lower corporate tax rates and reduced Federal regulation. In addition, with Q1 earnings season off to a strong start, it’s worth remembering that small caps have a higher earnings growth outlook than large caps. Wall Street’s consensus 12-month forward earnings expectations for the Russell 2000 Index currently stand at 26% versus only 11% for the large cap Russell 1000 Index.”
For more information on small-capitalization stocks, visit our small-cap category.