Can Small Caps Sustain Their Rally in Second Half of 2021?

The first half rally in small caps doesn’t appear to be running out of steam, which could mean more strength in the second half with exchange-traded funds (ETFs) like the Invesco S&P SmallCap 600 Revenue ETF (RWJ).

RWJ, which is up over 40% so far in 2021, seeks to track the investment results of the S&P SmallCap 600 Revenue-Weighted Index. The fund will invest at least 90% of its total assets in the securities that comprise the index.

The index is designed to measure the performance of positive revenue-producing constituent securities of the S&P Small Cap 600. The Parent index comprises common stocks of approximately 600 small-capitalization companies that generally represent the small cap universe of the U.S. equity market.

This ETF offers exposure to small cap U.S. stocks, an asset class included in most long-term portfolios, and can be useful for tactical traders looking to implement a tilt towards riskier securities. RWJ is one of the dozens of options for small cap exposure through ETFs, distinguishing itself from the alternatives through the unique weighting methodology employed.

RWJ’s methodology may appeal to investors who see value in a strategy that shifts exposure towards companies with low price-to-sales multiples and may also be appealing for those looking to utilize alternatives to market cap-weighting to avoid the strategy’s strategy tendency to skew towards overvalued stocks.
RWJ Chart

RWJ data by YCharts

Good Vibrations for Small Caps

Even with the new Delta variant, investors aren’t backing off the optimism circulating in the capital markets. Despite getting hit with a recent bout of volatility, investors have been forging on as the major indexes continue to reach new highs amid an economic recovery.

Per a Forbes article, “there is a feeling of optimism among investors driven by improving economic expectations, especially among smaller firms. Small-cap companies tend to be more sensitive to economic conditions.”

“Small-cap growth stocks are up 16.5% during the first half of the year, while small-cap value stocks are up 30.6%,” the article added. “The total return (including dividends) for the S&P SmallCap 600 index is 23.6% for the first half of the year and surpassed that of the mid- and large-cap index over the same period. The S&P MidCap 400 index is up 17.6% this year through June 30, while the total return for the S&P 500 index is up 15.3%.”

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