Small-Cap ETFs Still an Important Gauge of Broad Market Health | ETF Trends

The iShares Russell 2000 ETF (NYSEArca: IWM), the largest ETF tracking smaller companies, is up 17.48% year-to-date and the benchmark’s recent price action could be an important tell for the broader market over the next few months.

Due to the domestic focus of small-cap companies, it was also believed these stocks would be less vulnerable to global trade spats, but recent price action in the group suggests otherwise. However, small-cap stocks were among the first assets to enter bear markets when U.S. markets tumbled in the fourth quarter.

“While the Russell 2000 small-cap index has lagged the major averages, still down more than 10 percent from its September highs, market watchers say its next move will be critical to where stocks go in the next few months,” reports CNBC.

Small-cap stocks may also be lacking near-term catalysts and the levered nature of some smaller companies could leave small caps vulnerable if the business cycle turns.

Another Idea

Some investors may be looking to get involved with small caps now, but are concerned about volatility and potential declines. One way of getting some protection against those scenarios is with the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV).

SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.

“Most small caps are high-yield companies with floating-rate debt, so as yields eventually go up, that debt service goes up, and that reeks of the interest-only adjustable-rate mortgage crisis that led to the subprime crisis,” said Mark Tepper, president and CEO of Strategic Wealth Partners, in an interview with CNBC.

However, dividend growth stocks, such as those found in SMDV, are often seen as quality names with strong balance sheets. SMDV proved less volatile and performed less poorly when small-cap benchmarks swooned last year, plus the ProShares fund has a higher dividend yield than the Russell 2000.

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