U.S. small-cap stocks and exchange traded funds, such as the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM), have been widely highlighted as laggards among equity ETFs this year.
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.
Somewhat quietly, IWM is higher by more than 3% over the past month, topping the S&P 500 along the way. That could be a sign of more upside to come for smaller stocks.
“On a chart of the Russell 2000 relative to the S&P 500, technical analyst Carter Worth noted that the small-cap index was underperforming its large-cap counterpart toward the end of 2015, but has since played a massive game of catch up,” reports CNBC. “Additionally, Worth highlighted a key consolidation period over the last several months on the chart, which could lead to a massive move higher.”
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.
Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies. However, the dollar is sagging this year and the Federal Reserve could be forced to hold off on more rate hikes, scenarios that are pressuring small-caps.
The Fed meets this week amid expectations of its second rate hike this year.
“Here is the tight range of the Russell 2000, and it’s about 6 months in the making. It’s only happened one other time in the history of the index … and the last time it was resolved by a huge explosion on the upside,” said Worth in an interview with CNBC.
Data suggest investors remain leery of small-caps. For example, IWM has lost just over $2 billion in assets during the second quarter, a number surpassed by just two other ETFs.
Tom Lydon’s clients own shares of IWM.