Small-Cap ETFs' Moment to Shine

Small-capitalization stocks and related ETFs are finally taking the lead after underperforming their larger counterparts for the past one- and three-year periods.

U.S> small-cap stocks as measured by the Russell 2000 Index have kept up with the U.S. large-cap segment as measured by the Russell 1000 Index year-to-date and even pulled ahead over the past month and so far into March.

For instance, the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 Index, advanced 6.7% over the past month while the iShares Russell 1000 ETF (NYSEArca: IWB), which follows the benchmark Russell 1000, increased 4.2%.

“Several fundamental factors are driving recent small cap alpha,” Alec Young, managing director, global markets research, FTSE Russell said in a research note. “First, the Russell 2000 Index constituents have a much lower 19% international revenue exposure than the Russell 1000 Index’s 38%. As a result, it has been less affected by recent trade war fears.”

President Donald Trump has stoked global trade war fears after implementing a tariff on steel and aluminum imports. While larger companies with an international foot print, notably U.S. manufacturers that export finished goods out, have come under fire, most small-cap companies generate most of their revenue from the domestic economy.