ETF Trends CEO Tom Lydon discussed the iShares Russell 2000 ETF (IWM) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.

This ETF is one of several offering exposure to the Russell 2000 Index, a widely followed measure of small-cap U.S. stocks. Given this investment objective, IWM may be useful in several different ways; more active investors may use this fund as a way to establish short-term exposure to a risky asset class when risk tolerance is expected to climb, while IWM can also be appealing as a way of accessing an asset class that should be included in any long-term, buy-and-hold portfolio.

With a change in market leadership, the small-capitalization Russell 2000 index just enjoyed its first closing high in over two years, boosted by the prospects of a vaccine for the deadly COVID-19 pandemic that hobbled global economies and disproportionately weighed on smaller companies.

The Russell 2000 index finished the week ended Friday up a 6.1%, far outstripping the return for its large-cap counterparts. The all-time closing high also ended the Russell 2000’s longest record drought since April 2011. It went 554 trading days without a new record close through last November 12. It’s the third-longest record drought on record.

The last time the Russell 2000 index scored an all-time closing high was August 2018, and the last time the S&P 500 and the small-cap Russell 2000 finished at records on the same day was also 2018.

Coronavirus Vaccine Hopes a Game-Changer

A report by Pfizer and its German partner BioNTech on Monday, which indicated that a coronavirus experimental vaccine was 90% effective, sparking hope that cures and remedies for the deadly illness may be in the offing as a resurgence of the virus is at hand. BioNTech’s CEO Ugur Sahin said the vaccine might have longevity for up to a year with the potential to ” reimmunize” following.

Eli Lilly is also making progress on its own vaccine Economists, including Moody’s John Lonski, argue a vaccine is a game-changer for economic growth that has been trampled by the pandemic. Businesses, including restaurants, shopping malls, commercial real estate, hotels, and airlines, need to see consumer demand snap-back, which is not likely until a vaccine is approved and delivered to the general public.

Biden and Stimulus

Investors are hoping that a victory for Biden would translate to spending on the coronavirus aid package, along with spending on programs for everything from infrastructure to renewable-energy projects. The current environment is reminiscent of a similar situation four years ago when markets were betting on a Donald Trump victory and the increased spending on infrastructure programs and deregulation that would support small-caps.

Also may not see a Biden tax hike as the economy is still recovering, along with a split Congress. Increased fiscal spending could also support a shift toward cyclical companies, which are more tied to the broader economic recovery. These smaller companies, banks, manufacturers, and commodity producers typically do better as the economy exits a recession.

Small-cap companies typically show an advantage over large- and mid-cap stocks during the initial stages of an economic expansion phase. Small-cap stock performances are more correlated with U.S. GDP, so small-caps’ financial performance may be more aligned with the initial U.S. economic expansion period than large-caps.

The economy doesn’t have to recover instantly. We just have to have confidence that it’s coming.

Listen to the full podcast episode on the IWM ETF:

For more podcast episodes featuring Tom Lydon, visit our podcasts category.