Are Small-Cap ETFs Running Out of Gas?

ETF Trends

Small-cap ETFs such as iShares Russell 2000 (IWM) are beating the S&P 500 this year but there are some signs the category is losing its performance edge.

A trend change could have implications for the overall market. However, it’s not clear that the underperforamnce of small-cap stocks means the rally is in immediate danger.

IWM rose to a new all-time high early Monday as stocks rallied on news Larry Summers withdrew his name for consideration as next chairman of the Federal Reserve. However, the small-cap ETF barely posted a gain Monday due to a late-session pullback.

IWM underperformed the S&P 500 on the session, which is not a healthy sign, according to Tarquin Coe, technical analyst at Investors Intelligence.

“With the early August high now tested a large potential bearish momentum divergence exists,” he wrote in a newsletter.

The small-cap Russell 2000 ETF is up 25.5% year to date, compared with a gain of 20.9% for the S&P 500, according to Morningstar.

Sam Stovall, chief equity strategist at S&P Capital IQ, was out with a note this week examining if the eventual underperformance of small-cap stocks relative to large-cap issues will signal the end to this bull market.

“In other words, could the performance of small-cap stocks, relative to large-cap issues, act as a canary in the coal mine or early warning signal for an impending bear market? My answer was no, since small-cap stocks have historically beaten large-cap issues during most complete years of bull markets, and actually kept singing during the first two years of the dot-com cave-in,” Stovall wrote.

Next page: ‘Canary in a coal mine’

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