Small-cap stocks and related exchange traded funds have strengthened in the ongoing bull market run and may still have more room to maneuver.
Over the 12-month period ended September 2017, the Russell 2000 Index, the underlying benchmark for the widely monitored iShares Russell 2000 ETF (NYSEArca: IWM), returned 20.7%, and since the last major market correction in February 2016, the Russell 2000 increased 60.1%, Tom Goodwin, senior research director for FTSE Russell, said in a note.
To better gauge the recent run up, we can take a look at valuations. Since 1986, the current price-to-book ratio is at 2.42, or above the historical average of 2.07, and it is heading outside its +/- one standard deviation from the historical mean but still short of the peak of over 3 that occurred during the dot-com boom of the late 1990s.
When looking at the price-to-earnings ratio and also accounting for inflation, Goodwin found that the Russell 2000 is actually trading below its historical mean but still well within its historical one-standard-deviation band.
Another way to interpret the current market conditions among small-cap stocks is by the length and breadth of their performance. Small-cap bull markets have lasted a median 698 trading days with a total median total index return of 106.8%. For the current bull market that started February 11, 2016, it has been 446 days with a total return of 57.6% as of November 15, 2017.
“So compared to history, neither valuation ratios nor the duration of the bull market seem to be at extremes,” Goodwin said.
Lastly, the expected volatility may be seen as another indicator of the small-cap’s run or potential for a stumble ahead. A high expected volatility would be a signal for hurdles to come, and the current CBOE Russell 2000 Volatility Index shows forward looking options are currently hovering near historically low levels or are reflecting a relatively subdued volatility outlook.
A unique small-cap ETF play is the Oppenheimer Small Cap Revenue ETF (NYSEArca: RWJ).
RWJ follows a revenue weighting methodology, which could provide diversified exposure to the market, is not influenced by stock price, reflects a truer indication of a company’s value and offers stable sector exposure. Moreover, revenue weighting may provide a more value-oriented portfolio and historically outperformed in a value-driven market while showing lower drawdowns during growth-driven markets.
For more information on the small-capitalization market, visit our small-cap category.