Small Cap ETFs Have Taken Control

Small Cap ETFs Have Taken Control

Small-capitalization stocks and related ETFs have been outperforming their large cap counterparts by the widest margin in over two decades as investors shift out of coronavirus pandemic plays and look to a broad economic recovery.

The iShares Russell 2000 ETF (IWM), which tracks the widely observed Russell 2000 Index, increased 15.8% so far this year and jumped 42.1% over the past year. Meanwhile, the iShares Core S&P 500 ETF (NYSEArca: IVV), which tracks the benchmark S&P 500 Index, gained 4.8% year-to-date and advanced 23.8% over the past year.

IWM 1 Year Performance

Through the end of last Friday, the Russell 2000 index of small companies climbed 15% and set 10 closing records in 2021, well above the S&P 500’s 4% gain, marking the widest such gap between the two indices through Feb. 19 since 2000, the Wall Street Journal reported.

“There’s still a lot of ground that small-caps can make up, given that they’ve lagged for most of the previous [economic]expansion,” Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, told the WSJ.

Small capitalization stocks have been outperforming in anticipation of greater fiscal spending from the Biden administration, which is pushing for a $1.9 trillion relief package. Additionally, many are growing more optimistic over the broad economic recovery with accelerating vaccination rollouts.

“[It] has really been a sentiment shift. It’s basically the market’s expectation that significant fiscal stimulus is coming to the rescue,” Amanda Agati, chief investment strategist at PNC Financial Services Group, told the WSJ, warning that the small cap leadership is reliant on consumer spending and other economic indicators that would have to quickly return to pre-pandemic levels to justify gains.

Smaller companies are more sensitive to changes in the domestic economy, compared to their larger peers, which also have a large international footprint. Economically sensitive sectors like energy, materials, and banking also make up a greater portion of the Russell 2000 than larger indexes. Once pummeled cyclical sectors are now attracting bargain hunters betting on a broader recovery.

“The stars are really lined up for small-caps as an asset class this year,” Amy Zhang, a small cap fund portfolio manager at Alger, told the WSJ.

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