Small-cap stocks and the Russell 2000, the benchmark small-cap index, made headlines last year for lagging their large- and mid-cap counterparts, but that laggard status is being shed as some marquee small-cap exchange traded funds look poised to breakout.
Over the past 90 days, the iShares Russell 2000 ETF (IWM) , SPDR Russell 2000 ETF (TWOK) and the iShares Core S&P Small-Cap ETF (IJR) are up an average of 6.1%. More upside could be on the way for these ETFs and their rivals if the charts prove accurate.
“The Russell 2000 was in the news last year for being an under performer. As you can see over the past 100 days, Small Caps have actually done well, as they are leading this pack, up 7% more than large caps,” according to Chris Kimble of Kimble Charting Solutions.
More attractive valuations in small company stocks relative to their larger counterparts and the U.S. growth outlook are helping small-cap exchange traded funds reach new highs. Small-cap valuations now look more attractive, with the S&P 600 trading at about 20.3 times 2015 earnings, below the trailing 20-year average and about 7 points below the level at the start of 2014.
IJR is a member of the growing iShares core lineup aimed at cost-conscious investors. The ETF charges 0.12%, which is toward the lower end of the expense ratios found on small-cap funds. IWM charges 0.2% per year. [Small-Cap ETF Differences are Important]
“Did the Russell create a bullish inverse head & shoulders pattern over the past year? For a good deal of time last year, the Russell found overhead resistance pretty heavy. Of late the Russell is attempting to push above old resistance and is attempting to test old resistance as new support. What the Russell does in the next few weeks could tell us a ton….is this a very bullish pattern or a fake out at resistance,” adds Kimble.
Investors looking to participate in resurgent small-caps without making single stock commitments would do well to stick with ETFs.
“The returns of 66.23% of mid-cap managers and 72.92% of small-cap managers lagged those of the S&P MidCap 400 and the S&P SmallCap 600, respectively, on a one-year basis. Similar to the results in the large-cap space, the overwhelming majority of mid- and small-cap fund managers underperformed their benchmarks over the longer-term horizons as well,” according to the recent SPIVA scorecard from S&P Dow Jones. [Another Bad Year for Active Management]
Over the past 10 years, over 88% of active small-cap managers attempting to beat the S&P SmallCap 600 Index have failed to do so, according to S&P data.