Sizing Up Small-Cap ETFs Performing Admirably This Year

The iShares Russell 2000 ETF (NYSEArca: IWM), the largest exchange traded fund tracking smaller stocks, and the rival iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which follows the S&P SmallCap 600 Index, are performing admirably this year, but with Election Day nearing, investors should closely examine allocations to volatile small stocks.

That includes assessing how smaller stocks could react to the possibilities of the Federal Reserve raising interest rates in December. Small caps have been spared a rate hike to this point in the year as the Fed has extended its lower for longer policy.

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Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.

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.

Looking at IWM’s technicals, “two important resistance areas to watch are near 127.00 and 129.10. The first level represents channel resistance that capped most of the market action in 2015, even though price poked briefly higher. The second level represents the actual price high in 2015. The most probable scenario has IWM reaching a new high before failing, which means that 129.1 should be tested and exceeded, even if only briefly,” according to See It Market.

As the broad equities market pushes toward new highs, riskier assets like small-caps have been able to rally back much quicker. When the economy is doing well and the markets rally, we see sentiment for more nimble smaller companies improve and outperform those of their more languorous, larger peers.

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“There is also a small possibility that the main decline could begin even before the pattern is technically complete. That type of truncation of pattern can happen at major highs and major lows, especially when there is already divergence among different stock indices. Therefore, it will be important to monitor IWM price behavior at more than one resistance area,” adds See It Market.

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

Tom Lydon’s clients own shares of IWM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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