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.
According to the CME Group, E-mini Russell 2000 Index futures showed steadily growing activity. June 15 was the expiration date for June futures contracts and the end of the roll period – the final date when traders roll out of the existing June contracts into the December contracts. As of June 15, total open interest for E-mini Russell 2000 Index futures was at over 608,000 contracts with an average daily volume of 142,000 contracts.
CME especially highlighted the growing interest in global investors, especially volume coming from Europe, Asia-Pacific and Latin America regions in addition to North America.
“The strong performance of the Russell 2000 Index continues to reflect the importance of the small cap space in customers’ investment and trading strategies,” Tim McCourt, CME Group managing director and global head of equity products and alternative investments, said in a note. “Given the composition of the index, the Russell 2000 provides a unique tool that is more US-domestic in nature; particularly in 2018 where we have seen certain US economic factors come to light such as stronger economic growth and tax reform. In addition, we have seen growing interest in US small caps by our non-US clients. This has helped drive more geographically diversified sources of volume as participants look to capitalize on the distinct exposure the Russell 2000 provides.”
For more information on small-capitalization stocks, visit our small-cap category.