Small-Cap ETFs Are Beginning to Shine | ETF Trends

As we come to terms with a lower-for-longer yield environment, investors will turn to riskier assets like small-cap exchange traded funds to bump up returns.

Isabelle Mateos y Lago, the global head of the firm’s official institutions group, argued that money managers are shifting out of traditional haven assets for returns and into riskier securities, Bloomberg reports.

“Portfolio construction is being completely taken back to the drawing board because people understand we’ll face these low interest rates for a long, long time,” Mateos y Lago told Bloomberg. “Asset owners are trying to get yield and returns in line with their mandate. Thanks to that you’re seeing capital flow back to emerging markets who direly need that.”

For example, money is flowing back into corporate bond markets. Additionally, the combination of aggressive stimulus measures and a broader economic reopening, despite concerns over another wave of Covid-19 infections, may cause a rotation within equities.

“You should see less outperformance from these tech stocks that have benefited so much from the lockdown,” Mateos y Lago added. “People are warming up to small caps, cyclicals and things that tend to do well in reflation and expansion.”

Small-cap companies typically show an advantage over large- and mid-cap stocks during 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. However, once the economic cycle matures, investors tend to turn more cautious and shift over to larger companies.

Small-caps are already taking the lead as more investors look beyond this year’s technology growth stocks that have outperformed. Over the past month, the iShares Russell 2000 ETF (NYSEArca: IWM) increased 9.5%. The small-cap growth category has also been outperforming with the iShares Russell 2000 Growth ETF (NYSEarca: IWO) gaining 12.1%. In comparison, the iShares Core S&P 500 ETF (NYSEArca: IVV) rose 5.2% over the past month.

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