A prominent theme in the world of U.S. equity exchange traded funds in 2017 is the severe laggard status of small-cap funds. For example, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM) are up an average of 2.3% compared to a 9.3% gain for the S&P 500.
Small-cap weakness is prompting some professional investors to increase bearish bets against the asset class, particularly as doubts increase about the ability of President Donald Trump to push forward key parts of his domestic economic agenda that were seen as catalysts for smaller stocks.
The aforementioned IWM is the biggest ETF tracking the widely followed Russell 2000 Index. Following Election Day, investors flocked to IWM, IJR and rival small-cap ETFs as markets priced in President Donald Trump’s “America First” mantra that would help domestically-oriented companies led the next leg in economic growth.
However, the market’s enthusiasm for small-caps has recently waned in dramatic fashion prompting some traders to call for more downside for the group.
Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.
“Large speculative investors agree. They hold the biggest net short position in six years on the Russell 2000, according to data compiled by the Commodity Futures Trading Commission. That hedge funds were the most bullish in history on the small-cap gauge as recently as January highlights the degree to which investors have thrown in the towel on the so-called Trump trade,” according to Business Insider.