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Popular Small-Cap ETF Play Is Not Without Risk

This article was originally published on ETFTrends.com.

Small-capitalization stocks and Small-Cap ETFs have attracted a lot of interest in recent months as investors tried to limit the negative effects of heightened trade war concerns, but the popular play may come with risks.

The iShares Core S&P Small-Cap ETF (IJR) , which tracks the S&P Small-Cap 600 Index and the second largest small-cap related ETF, was among the most popular ETF plays of 2018, bringing in close to $4.0 billion in net inflows year-to-date.

Over $4 billion has found its way into small-cap ETFs and mutual funds in May and June alone while U.S. stock funds as a whole experienced billions of dollars in outflows every month this year, reports Danielle Chemtob for the Wall Street Journal.

Small Caps & Tariffs

While small-caps have outperformed and continued to attract investment interest, some analysts warned that the strong corporate earnings and economic data could conceal tariff's potential negative impact on small businesses.

For instance, at least half a dozen small, domestically focused companies, including motor-home manufacturer Winnebago Industries Inc., lighting firm Acuity Brands Inc. and agricultural machinery maker Art’s Way Manufacturing Co., have warned that recent tariffs on steel and aluminum, among a number of other Chinese goods, threaten to disrupt their businesses.

“Right now, all this is muted because the U.S. economy happens to be growing very strongly,” Mary Lovely of the Peterson Institute for International Economics told the WSJ. “Longer out, this is going to affect consumer spending and more importantly it’s going to affect investment in the U.S.”

Analysts cautioned that the recent momentum-based trading that has helped propel the small-cap and technology plays could quickly sour, potentially leaving investors vulnerable to a quick sell-off.

The small-cap play may be overbought, with the benchmark Russell 2000 now trading at a forward price-to-earnings of 22.4 as of Thursday, compared to the S&P 500's 16.6.

“You’re overpaying for a company that’s considered safe,” Jeff Holzmann, managing director at Iintoo, told the WSJ.

For more information on the markets, visit our current affairs category.

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