Troublesome Signs For Small-Cap ETFs

U.S. small caps have been laggards for essentially all of this year, but the current state of affairs for smaller U.S. stocks is getting downright troubling. While large-cap indexes, such as the Dow Jones Industrial Average, regularly hit record highs, exchange-traded funds such as the iShares Russell 2000 ETF (NYSE:IWM) and the iShares Core S&P Small-Cap ETF (NYSE:IJR) are scuffling.

Over the past week, IWM and IJR are down 1.6 percent and 1.3 percent, respectively. Over the same stretch, the S&P 500 is basically flat while the Dow is up 1.6 percent. Year to date, the Dow is up 11 percent, or more than double the returns offered by IWM.

Other data points suggest small-caps could face more downside.

Discouraging Signs

On Wednesday, small-cap ETFs like IJR and IWM saw their biggest downdrafts since mid-May, and both funds have already clipped their 50 day moving averagess (we will watch them closely throughout the day to see what the market close looks like), said Street One Financial Vice President Paul Weisbruch in a note Wednesday. Fund flows have not been kind to IWM year-to-date, as we have seen over $4.2 billion leave the fund in 2017 including greater than $2 billion just in the trailing one month period alone.

The $35.8 billion allocates 18 percent of its weight to financial services stocks. Underscoring the notion that what is good for large-caps does not always equal small-cap success, the ETF allocates almost 32 percent of its combined weight to technology and healthcare names. Those are the two best-performing sectors in the S&P 500 this year, but small-cap indexes are still struggling. For its part, IJR has been adding assets while IWM loses cash.

Even in the dismal trailing one month period in terms of IWMs fund flows, IJR has managed to capture over $720 million in new assets via creation, so it is certainly possible that for various reasons holders of IWM are migrating out of the product and into IJR in some cases, said Weisbruch.

Getting Adventurous

Traders that are willing to bet on a snap-back rally in small-cap stocks can consider the Direxion Daily Small Cap Bull 3X Shares (NYSE:TNA). TNA, which is one of the most popular leveraged bullish ETFs, attempts to deliver triple the daily returns of the Russell 2000.

TNA's bearish counterpart, the Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA), which surged more than 3 percent yesterday, looks to deliver triple the daily inverse returns of the Russell 2000. For the 30-day period ended Aug. 1, both TNA and TZA averaged daily inflows with the advantage going to the bearish fund by a wide margin, according to Direxion data.

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