Small Caps Are Beating the S&P 500 by the Widest Margin Since 2003. These ETFs Let You Ride the Rally
Small-cap stocks are experiencing one of their strongest stretches in decades, outperforming the S&P 500 by the widest margin since 2003. The Russell 2000 is up approximately 20% YTD, with the iShares Russell 2000 ETF (IWM), iShares Core S&P Small-Cap ETF (IJR), and Vangu…
Intelligence analysis by Llama
Small-cap stocks are experiencing a strong rally, with the Russell 2000 up 20% YTD. Investors can participate in this rally through ETFs such as IWM, IJR, and VB, which provide broad and quality-screened small-cap exposure.
Imagine you're at a big store with lots of different sections. Small-cap stocks are like the smaller sections of the store that people don't always notice. But right now, those sections are doing really well and are even beating the big sections. This is because people are starting to notice the smaller sections and are investing in them.
Analysis
A $60B Vote of Confidence
The small-cap rally is a significant development in the financial markets, with the Russell 2000 up approximately 20% YTD. This outperformance is the widest margin since 2003, and it highlights the resilience of the U.S. economy despite heightened global uncertainty. The rally is driven by investors looking beyond the handful of mega-cap technology companies that have driven much of the market's gains in recent years. Instead, they are focusing on smaller, domestically focused companies that have continued to gain momentum.
Why Cursor?
One reason for the small-cap rally is the growing concern that AI-related stocks have become increasingly expensive. As a result, investors are rotating into more attractively valued segments of the market, including small-cap stocks. The valuation gap between small and large-cap companies remains significant, with the iShares Russell 2000 ETF (IWM) trading at a price-to-earnings and price-to-book of 15.78x and 1.99x, respectively. In comparison, the State Street SPDR S&P 500 ETF (SPY) trades at a price-to-earnings and price-to-book of 21.01x and 4.61x.
The Road Ahead
The small-cap rally is expected to continue, with many investors finding the valuation buffer between large-cap and small-cap stocks attractive. The iShares Russell 2000 ETF (IWM) is one of the most widely recognized small-cap ETFs, with $82.70 billion in assets under management. The fund tracks the Russell 2000 Index, which includes approximately 2,000 U.S. small-cap companies spanning a broad range of industries. With an expense ratio of just 0.19%, the fund continues to be a favorite among long-term investors and traders alike.
Key points
- The Russell 2000 is up approximately 20% YTD, outperforming the S&P 500 by the widest margin since 2003.
- The iShares Russell 2000 ETF (IWM), iShares Core S&P Small-Cap ETF (IJR), and Vanguard Small-Cap Index Fund (VB) provide small-cap exposure.
- The valuation gap between small and large-cap companies remains significant, with the iShares Russell 2000 ETF (IWM) trading at a price-to-earnings and price-to-book of 15.78x and 1.99x, respectively.
- The small-cap rally is expected to continue, with many investors finding the valuation buffer between large-cap and small-cap stocks attractive.
If the small-cap rally continues, it could lead to stronger returns for investors. The valuation gap between small and large-cap companies remains significant, providing investors with a wider margin of safety and greater upside potential if earnings continue to improve.
However, the small-cap rally is not without risks. If the U.S. economy were to slow down, it could negatively impact small-cap stocks. Additionally, if investors were to rotate out of small-cap stocks and into other segments of the market, it could lead to a decline in small-cap stock prices.
