Small-Cap ETFs Are Holding up Well…Sort Of

MarketsETF Trends

Major large-cap equity benchmarks, including the S&P 500 and Nasdaq-100 have been volatile in recent days, but perhaps surprisingly, the small-cap Russell 2000 Index has been holding up fairly well.

That could eventually lead to good things for exchange traded funds, such as the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM), among others.

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“While the Dow Jones industrial average, S&P 500 and Nasdaq Composite have all fallen around 5 percent in the last week, the small-cap stock index has declined a little more than 4 percent,” reports CNBC. “On Wednesday, the Russell 2000 closed the day barely positive while the Nasdaq Composite, S&P 500 and Dow all closed in the red.”

IWM is the biggest ETF tracking the widely followed Russell 2000 Index. Following Election Day, investors flocked to IWM, IJR and rival small-cap ETFs as markets priced in President Donald Trump’s “America First” mantra that would help domestically-oriented companies led the next leg in economic growth.

Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.

“During this week’s broad market decline, the Russell managed to bounce strongly off its 200-day moving average. That line proved great support for the index last year, so this resilience is positive on a technical basis,” reports CNBC, citing Matt Maley, equity strategist at Miller Tabak. “The technical picture, coupled with an expected bounce in the U.S. dollar, says the Russell is an index that outperforms going forward.”

When looking at the price-to-earnings ratio and also accounting for inflation, the Russell 2000 is actually trading below its historical mean but still well within its historical one-standard-deviation band.

“The Russell 2000 index could be well-positioned going forward as it appears to be holding up better than its large-cap peers amid a broader market sell-off,” according to CNBC.

Small-cap bull markets have lasted a median 698 trading days with a total median total index return of 106.8%. For the current bull market that started February 11, 2016, it has been 446 days with a total return of 57.6% as of November 15, 2017.

For more information on the small-cap segment, visit our small-cap category.

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