So much for the old adage that bigger is better.
While the S&P 500, Dow and Nasdaq continue to grab headlines for their remarkable runs, it’s the lesser-watched Russell 2000 that’s captivating the attention of savvy traders.
The index, which is comprised of 2000 small-cap stocks, closed Thursday just points off its record high, and has rallied some 26 percent year-to-date. That tops the four major averages, and is far better than the Dow’s 19 percent gain this year.
So why are investors choosing an index whose top performing names include stocks like Yelp and Orbitz over the Dow, which counts Disney and Coke among its components?
Traders say it comes down to two words: The Fed.
“This bubble has been blown by the Federal Reserve, and as of yesterday, they gave no indication that they were gasping for air,” said Brian Kelly, managing director of Brian Kelly Capital.
Small caps tend to be riskier by nature, and thus more volatile. When the market’s hot, they tend to outperform. But when the market’s not, well, watch out.
(Read: Big demand for small-cap stocks)
With the Fed indicating this week that they will not slow their simulative policies, investors are adding onto riskier assets by piling into the Russell.
"The broader move higher in equities, and lower in interest rates, is being confirmed by the more risk-sensitive small caps,” said Todd Gordon of TradingAnalysis.com.
Still, despite the big returns from small caps, some see better opportunities elsewhere, especially given the fact that many economies around the globe appear to be rebounding.
Said Gina Sanchez of Chantico Global, “Right now, I’ve been shifting out of the U.S. into Europe.”