Small Cap ETFs Try to Bounce Back off a Correction | ETF Trends

After suffering through its longest back-to-back declines since January, small-capitalization stock ETFs popped Thursday in response to Federal Reserve Chair Jerome Powell’s reassurances that both fiscal stimulus and vaccine rollouts supported the central bank’s rosier outlook.

The iShares Russell 2000 ETF (IWM) increased 1.7% on Thursday. The fund has decreased 8.7% over the past week.

Small cap stocks have weakened since Monday, before reversing course on Thursday.

“It looks like the Russell 2000 is going through a similar corrective process as the Nasdaq recently went through,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Bloomberg. “Both indices have had phenomenal runs and were both due for a pullback.”

The Russell 2000 has more than doubled over the past year as growing optimism over the economy helped drive a broad market rally in areas that previously fell behind in the post-coronavirus market rally in 2020.

“I expect additional weakness,” Sam Stovall, chief investment strategist at CFRA Research, said in a note. Though he added that the index “needs to retest its 50-day moving average before we know for sure whether the weakness will continue.”

IWM increased 97.2% over the past year. The ETF is also trading below its short-term resistance at the 50-day simple moving average.

The small cap category has underperformed its large cap peers, notably those mega cap tech companies that benefited in the post-coronavirus environment. However, a broader market rally has helped small caps outperform and even outpace the tech-heavy Nasdaq.

“Small caps have lagged for years so we’re glad to see them finally get their day — but it’s come pretty far pretty fast,” Lamar Villere, portfolio manager at Villere & Co., told Bloomberg “They’ve been on a tear. They got more beat up than large caps during the downturn so they had more of a boomerang. But it’s fast moving and gone pretty far. So it’s hard for us to find value there.”

IWM 1 Year Total Return

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