After the recent market hubbub, small capitalization stocks and related exchange traded funds are pulling ahead, and some investors are taking notice.
The iShares Russell 2000 ETF (NYSEArca: IWM) has rebounded after testing its 200-day moving average, outpacing its large-cap counterpart. Over the past week IWM was up 1.5% while the S&P 500 was 0.8% higher.
“There’s a lot of value in small-cap land if you can look through the rubble,” St. Denis Villere III, portfolio manager at Villere & Co., told Reuters.
ETF investors are also jumping back onto the small-cap train, with IWM attracting close to $2 billion in net inflows over the past week, according to XTF data.
Small-cap stocks were strengthening as traders renewed their outlook on the Trump administration’s pro-growth agenda. In recent weeks, U.S. markets have been roiled over uncertainty concerning President Donald Trump’s ability to push through pro-growth economic policies through Congress as the White House wades through political intrigue. However, the small-cap segment is recovering on expectations that the administration could overhaul the U.S. tax policy.
“For small-cap companies that are essentially the ones paying the highest taxes, any positive update on Trump’s plan to lower taxes is a big deal,” Walter Todd III, chief investment officer at Greenwood Capital Associates LLC, told Bloomberg. “This combined with the underperformance of small-cap stocks in the past four weeks now gives small caps a nice rally, though it’s too early to tell how durable the rally is.”
Related: ETF Investors Can Look Outside of U.S. for Value
Tax reforms could also support smaller companies pressured by a weaker dollar. Small-cap earnings lagged behind the 10% jump for large-caps.
“When everyone comes back from the holidays and the beach, what you generally see is the rationalization of earnings estimates, and quite frankly second-quarter earnings weren’t great,” DeSanctis said. “We have weak earnings, a lot of uncertainty around tax overhaul and some drama with the fiscal budget and the debt ceiling, these are some real issues that could hurt small-caps.”
Given the ongoing uncertainty, many still anticipate lingering volatility in the small-cap recovery, especially as smaller companies are “much more at risk than the large and more internationally exposed companies,” Michael Purves, Chief Global Strategist at Weeden & Co, told Reuters, citing concerns about the lack of a “cohesive mood” in Washington.
For more information on small-capitalization stocks, visit our small-cap category.