The iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the benchmark Russell 2000 Index, is up more than 2% over the past week and a slew of small-cap exchange traded funds continue hitting all-time highs.
On Tuesday, over 20 small-cap ETFs, including IWM, hit record highs. A stronger dollar 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.
Recently, betting against small-caps has been the wrong bet, but smaller stocks could cool off next month if the Russell 2000 Index (RUT) finishes May with a gain of 5% or more. The index is up about 4.6% this month.
“If the RUT finishes May with a gain of 5% or more, the index could cool off in June, if past is precedent,” reports Schaeffer’s Investment Research. “Looking at data since 2010, when the RUT ended the month higher by 5% or more, it went on to average a gain of just 0.19% the following month, according to data from Schaeffer’s Senior Quantitative Analyst Rocky White. For comparison, the small-cap barometer averaged a gain of 0.75% the month after locking in a gain of 0% to 5%, and soared nearly 2%, on average, following a monthly loss of up to 5%.”
A Cool Summer, But A Strong Year
Small-caps have trailed large-caps for a couple of years now, prompting some market participants to say smaller stocks are playing catch-up and could enter a long period of out-performance. Even if the Russell 2000 gives back some gains in June, the index could keep powering higher in the second half of the year.
“Nevertheless, the index has tended to outperform three and six months after a monthly gain of 6% or more,” according to Schaeffer’s. “Specifically, three months out, the RUT was up another 4.67%, on average. Six months out, the index was higher by 8.87%, on average. Plus, the RUT was in the black 85% of the time in both instances. For comparison, the small-cap index averages three- and six-month gains of just 3.08% and 6.19%, respectively, looking at anytime data since 2010.”
The $45.66 billion IWM allocates over 35% of its combined weight to financial services and technology stocks.
For more information on small-capitalization stocks, visit our small-cap category.
Tom Lydon’s clients own shares of IWM.