Small-Cap ETFs May Find Support from Foreign Investors

Small capitalization stocks and related ETFs have been outperforming their large-cap peers, and the outperformance has also drawn the attention of foreign investors.

The iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 Index, increased 10.3% year-to-date while the S&P 500 gained 4.0%.

U.S. small-cap stocks have also enjoyed a strong performance relative to other global equities, especially with the U.S. dollar strengthening against foreign currencies. The MSCI All Country World Index excluding U.S. declined 2.8% year-to-date.

“With many of 2018’s equity headwinds being international in nature, the Russell 2000 Index has outperformed the Russell 1000 Index due in large part to small caps’ lower international sales exposure,” Alec Young – managing director, global markets research, FTSE Russell, said in a note. “Being more domestic has insulated small caps from trade tensions, geopolitical worries and the earnings drag stemming from a stronger dollar. Being less global also gives small caps more exposure to several positive factors within the US, including tax reform, increasing deregulation and faster economic growth relative to weaker recoveries in Europe and Japan. All these tailwinds are helping drive faster profit growth for small caps relative to their blue chip counterparts, helping fuel YTD leadership while tempering relative volatility for this asset class.”

U.S. Small-Caps Attract Foreign Demand

Due to their strong performance, U.S. small-caps have attracted foreign investment, according to new data from FTSE Russell and CME.