While interest rates are climbing, growth stocks and small-caps are delivering impressive performances this year. The iShares Russell 2000 Growth ETF (NYSEArca: IWO) marries those two concepts and that exchange traded fund is up nearly 10% year-to-date.
The $10.97 billion IWO tracks the Russell 2000 Growth Index, the growth offshoot of the widely followed Russell 2000 Index.
“So far, 2018 has been characterized by an upward move in interest rates with some volatility around that trend. In March, the 10-year Treasury yield exceeded 3% for the first time in almost five years. This worries some equity investors who view higher interest rates as a threat to equity markets. That threat has yet to materialize,” according to a recent research note from index provider FTSE Russell.
Interesting Data When Treasury Yields Rise
While many investors may be conditioned to believe that when Treasury yields rise, stocks decline, data from FTSE Russell indicate the opposite is true.
“There is a clear pattern in these charts: on days when the yield rose, equities tended to rise as well and vice versa on days when the yield fell,” according to the index provider.
This year, micro- and small-caps have been notching positive returns on days when 10-year Treasury yields rise. A stronger dollar means large companies with an international footprint are more susceptible to lower overseas demand for their products. Meanwhile, smaller companies are able to capitalize on a stronger domestic economy.
Related: The Best Small-Cap ETFs Leading Market’s Charge
Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.
Data from FTSE Russell confirm that the Russell 2000 Growth Index, IWO’s benchmark, is performing well on days when 10-year yields rise.
“The reason equities have been positively correlated to rising interest rates recently is because higher rates represent a validation of global growth and are therefore consistent with healthy corporate fundamentals and thus good for stock prices,” said FTSE Russell Managing Director Alec Young.
For more information on small-capitalization stocks, visit our small-cap category.