Small-Cap ETFs are leading the markets charge this year.
Year-to-date, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P Small-Cap 600 Index, increased 10.9%; the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 Index, gained 9.2%; and Vanguard Small Cap ETF (NYSEArca: VB), which tracks the CRSP US Small Cap Index, rose 6.8%. In contrast, the S&P 500 was up 2.6% and and the S&P MidCap 400 Index was 4.1% higher so far this year.
Keeping the the small-cap’s momentum going, traders believed smaller companies were insulated from the overseas turmoil. A stronger U.S. dollar and concerns over weaker global growth also pushed investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy.
Small-Cap Outlook
Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data. U.S. economic conditions are also more favorable for the domestically oriented small-caps as companies are still digesting the benefits of increasing deregulation and U.S. tax reforms.
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The strengthening economic outlook for the U.S. has also helped strengthen the U.S. dollar against its basket of peers. With an appreciating U.S. dollar, large multinational U.S. companies will find revenue lowered when converted back to an appreciating USD, whereas small-cap companies are less affected by foreign revenue streams.
Furthermore, the upbeat pace in U.S. small-caps are attracting foreign investors as well. According to the CME Group, there is growing interest among global investors for U.S. small-cap exposure, especially with volume coming from Europe, Asia-Pacific and Latin America regions in addition to North America.
For more information on small-capitalization stocks, visit our small-cap category.