Small-Cap ETF Outlook Turns Murky

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), are noteworthy laggards this year.

For example, IJR has actually traded lower this year while IWM is clinging to a year-to-date gain of less than 1%. By comparison, the S&P 500 is higher 9.6%. Still, some market observers are leery of further upside for smaller stocks. 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.

“Large speculators turned more bearish on smaller companies in eight of the last nine weeks, with net short positions in Russell 2000 index mini futures reaching levels not seen since November 2009, data from the Commodity Futures Trading Commission show. Meanwhile, bullish holdings of S&P 500 futures rose to the highest since April,” reports Lu Wang for Bloomberg.

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.