Small-cap exchange traded funds have almost doubled the performance of the blue-chip Dow Jones Industrial Average, a bullish sign for domestic economic growth.
The iShares Core S&P Small-Cap ETF (IJR) is up 35.0% year-to-date, whereas the Doe Jones Industrial Average index is up 21.2% this year.
The outperformance in small-caps, compared to the Dow, is the widest for any year since 2003, according to Bloomberg. Additionally, in three of the past four times small-caps outpaced the Dow by this margin, the U.S. economy expanded faster the next year and equities remained bullish for another year or more.
The performance in small-caps gained momentum in the past four months, with the benchmark Russell 2000 increasing 14% since June 30, compared to the 4.4% rise in the Dow. [Small-Cap and Consumer ETFs Reasserting Themselves]
“If you’re focused on the U.S., and the U.S. is performing very well, then of course your revenues and earnings are going to be much better,” Kully Samra of Charles Schwab Corp., said in the article. “Other regions are at different stages of dealing with structural issues, and the U.S. has already dealt with them.”
Small-caps are a better indicator for the health of the domestic economy as many small businesses cater to domestic consumption, whereas large-cap companies tend to have a global footprint. [Traders Hedging with Small-Cap ETF]
“The main driver of small-caps is the cyclicality of the market,” Patrick Moonen, senior strategist at ING Investment Management, said in the article. “What are the economic prospects and how are risk aversion or risk appetite evolving? Both factors were clear tailwinds for small-caps so far this year.”
Economists predict the U.S. economy will grow 2.4% in the fourth quarter and hit 3% growth a year from now.
Some other small-cap ETFs include:
- iShares Russell 2000 ETF (IWM) : up 33.0% year-to-date
- Vanguard Small-Cap ETF (VB) : up 32.2% year-to-date
- Schwab U.S. Small Cap Fund (SCHA) : up 33.6% year-to-date
- PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS) : up 42.8% year-to-date
- SPDR S&P 600 Small Cap ETF (SLY) : up 34.6% year-to-date
For more information on small-cap stocks, visit our small-cap category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own IWM, SCHA.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.
- Dow Jones Industrial Average