The iShares Russell 2000 Index (IWM) and other small-cap ETFs have been outperforming the S&P 500 since the end of April in a sign that investors are taking on more risk.
In fact, the Russell 2000 fund is ahead for 2013 with a gain of 15.4% versus 13.8% for the S&P 500, according to Morningstar data.
“Small-cap stocks are outperforming, while large-cap stocks appear to be going through a phase of profit-taking,” said Craig Johnson, director of technical research at Piper Jaffray, in a note Monday.
Over the past four weeks, stocks with a market cap under $2 billion are outperforming stocks with a market cap of more than $5 billion in industrials, financials, consumer cyclicals, technology and healthcare sectors, he added.
“Small-cap stocks tend to be more volatile due to narrower economic moats, greater sensitivity to macroeconomic risks, and less exposure to faster-growing emerging markets,” according to a Morningstar analyst report on IWM. “With this greater volatility comes a higher beta and the expectation for higher returns.”
The small-cap fund has a 10-year annualized return of 9.5%, versus 7.3% for the S&P 500.
The chart below shows the relative performance of IWM versus the S&P 500.
Full disclosure: Tom Lydon’s clients own IWM and SCHA.
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.