Small-capitalization stocks and small-cap ETFs broke into new record heights Wednesday.
The iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 Index, rose 1.0% Wednesday while its underlying benchmark was 1.2% higher and hit a new intra-day record high.
“Small caps present a cleaner play than large caps on two fundamental market drivers: lower corporate taxes and a stronger US economy,” research firm DataTrek wrote in its morning briefing on Wednesday, Reuters reports.
Small-caps have been outperforming their larger peers, with IWM up 4.7% year-to-date while the S&P 500 gained 2.1%. The Russell 2000 Index has also gained 9% from its lowest 2018 close in early February while the S&P 500 rebounded 6%.
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Along with support from the recent corporate tax cuts enacted in December, the expanding domestic economy and appreciating U.S. dollar are strengthening sentiment for small businesses.
“When the economy is stronger than normal, small caps do better,” Ryan Detrick, senior market strategist for LPL Financial, told Reuters. “With a good economy like we’ve seen happening this year, we fully expect this to keep playing out in the second half of the year.”
Benefits of Small-Cap Companies
Small-cap companies have often paid higher tax rates than their larger rivals, which means that in many cases they have more to gain from the tax cuts introduced this year.
A stronger USD 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.
Furthermore, the domestic focus of many small-caps also makes this asset category less vulnerable ahead of trade concerns between the United States and China as Beijing and Washington D.C. try to resolve a dispute that many warned could have deteriorated into an all out trade war.
For more information on small-capitalization stocks, visit our small-cap category.