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The Small-Cap ETF Riddle


There has been ample chatter in recent weeks regarding weakness in small-cap stocks and exchange traded funds.

No, the chart for the iShares Russell 2000 ETF (IWM) is not a thing of beauty. The largest small-cap ETF entered trading Thursday more than 5% below its 50-day moving average and 1.6% below its 200-day line. The chart shows IWM is highly vulnerable to additional price retrenchment.

Despite the warnings, of which there have been plenty, investors are displaying some curious behavior with small-cap ETFs. For example, IWM has seen inflows of almost $319 million over the past month while losing more than 2%. [Small-Cap ETFs Falter]

The iShares Core S&P Small-Cap ETF (IJR) has shed $164.5 million while the Vanguard Small-Cap ETF (VB) has lost $22 million despite a modest one-month increase.

There are additional signs investors are not yet willing to commit to overtly bearish positions against small-caps. The Direxion Daily Small Cap Bear 3X Shares (TZA) was Direxion’s second-best bearish ETF in May entering Thursday’s session, according to issuer data.

Conversely, the Direxion Daily Small Cap Bull 3X Shares (TNA) is the issuer’s third-worst bullish ETF this month, but creation and redemption data indicate investors either expect the small-cap decline to be short-lived or that they are wrong. Over the past 30 days, TNA has seen creation activity while shares of TZA have been redeemed, according to Direxion data.

Then there is the flawed notion of attempting to identify leaders among U.S.-focused small-cap ETFs. It is not difficult to make a list of U.S. small-cap ETFs that have been better than IWM over the past month, but “better” in this case really means “less bad.”

Of the 10 best non-leveraged broader small-cap ETFs over the past month, nine are international funds, a group that includes some surprises and familiar names. That group is populated by the Market Vectors Russia Small-Cap ETF (RSXJ) , Market Vectors India Small-Cap Index ETF (SCIF) and the WisdomTree Europe SmallCap Dividend Fund (DFE) , among others. [Global Small-Cap ETFs Rally While U.S. Rivals Falter]

Direxion Daily Small Cap Bear 3X Shares


Tom Lydon’s clients own shares of IWM.