TLT, Russell 2000 ETFs Top SPY, Big Tech in July
Investors betting on a slowing economy, cooling inflation, and falling interest rates while shying away from high-flying mega-cap tech stocks were rewarded handsomely in July.
The long-term bond market proxy, the iShares 20+ Year Treasury Bond ETF (TLT), jumped 3.6% last month while the stock market benchmark, the SPDR S&P 500 Trust ETF (SPY), had a modest gain of 1.2%.
July’s market story is not just “risk-off,” but also one of market rotation in the equity space, as small-cap funds like the iShares Russell 2000 ETF (IWM) produced a massive gain of 10.3% in the month while big-tech ETFs like the Technology Select Sector SPDR ETF (XLK) fell 3.3%.
Why Long Term Treasury, Russell 2000 ETFs Won in July
The outperformance of both long-term Treasury ETFs and Russell 2000 ETFs in July can be attributed to changing investor expectations about interest rates and economic growth, as well as perceived high valuations for mega-cap technology companies. This led to a rotation of assets from large-cap growth stocks to safer havens and smaller, more cyclical companies.
Long-Term Treasury ETFs
Bond yields decline: The primary reason for the outperformance of long-term Treasury ETFs in July was a decline in bond yields, which have an inverse relationship with bond prices. Bonds with longer maturities (higher duration) are more rate sensitive than short-term bonds.
Fed rate expectations: Expectations of potential Federal Reserve interest rate cuts due to easing inflation contributed to the decline in bond yields, boosting the value of long-term Treasury bonds.
Safe-haven asset: Treasuries are often considered safe-haven assets, and during periods of market uncertainty or economic slowdown, investors tend to flock to these bonds.
Russell 2000 ETFs
Small-cap rally: The Russell 2000 index is composed of small-cap stocks, which tend to be more cyclical and sensitive to economic conditions.
Interest rate expectations: The expectation of potential interest rate cuts is generally positive for small-cap companies, as lower borrowing costs can stimulate economic growth and benefit these businesses.
Rotation from large-cap to small-cap: There was a noticeable shift in investor sentiment away from large-cap tech stocks (heavily represented in the S&P 500) and toward smaller companies.
Outlook: Long-Term Treasury, Russell 2000 ETFs
Here are potential scenarios to watch and consider for long-term Treasury ETFs and Russell 2000 ETFs in the coming months:
Long-Term Treasury ETFs
Interest rate sensitivity: The primary driver for long-term Treasury ETFs remains interest rate movements. If interest rates continue to decline, these ETFs could continue to perform well. However, if rates start to rise, their value will likely decrease.
Economic outlook: The overall economic health will also influence Treasury ETF performance. A recession could lead to increased demand for safe-haven assets like Treasuries, while a strong economy might push investors toward riskier assets.
Russell 2000 ETFs
Economic growth: The performance of Russell 2000 ETFs is closely tied to economic growth. If the economy continues to expand, small-cap companies are likely to benefit, driving up the value of these ETFs.
Interest rate environment: While small-cap companies often benefit from lower interest rates, excessively low rates can be associated with a recession, which would also negatively affect profitability. Thus, a “soft landing” is ideal for small companies.
Market rotation: A continued trend where investors rotate from large cap to small-cap stocks can influence the performance of Russell 2000 ETFs.
Investing in a mix of asset classes, including both long-term Treasury funds and Russell 2000 ETFs as part of a diversified portfolio, can help manage risk, and investing for the long term can help smooth out short-term market fluctuations.