Market Overview

Small-Cap ETFs Are Trouncing Large-Cap Rivals

Small-Cap ETFs Are Trouncing Large-Cap Rivals

Small-cap stocks and the related exchange-traded funds have been outperforming large-cap rivals for several months now. That's not new news, but what's interesting is the margins by which smaller companies are outpacing larger firms.

For the three months ended June 1, the S&P SmallCap 600 Index is up 9.1 percent compared to just 2.1 percent for the S&P 500. The $41.69 billion iShares Core S&P Small-Cap ETF (NYSE: IJR) is one of several ETFs tracking the S&P SmallCap 600 Index.

What Happened

“Small caps just outperformed large caps for three consecutive months for the first time since Sep. 2016,” said S&P Dow Jones Indices in a note out Monday. “From Feb. through May, the S&P SmallCap 600 (TR) outpaced the S&P 500 (TR) by 9.5 percent. It is the biggest premium realized in a three month period since the three months ending in May 2002. In fact, outperformance this big has only happened in a three month period twelve times in history since Sep. 1989.”

Underscoring the strength in small-caps, each of the 11 sectors represented in the S&P SmallCap 600 generated positive returns last month.

Why It's Important

There's more to the story of all small-cap sectors delivering gains in May.

“This is the first time all the small cap sectors are positive together in a month since Dec. 2016, and it is a historically quick comeback from Feb. when all the sectors were negative,” said S&P Dow Jones. “This is only the 9th time in history since Jan. 1995 that the small cap sectors went from all losing to all winning in three months or less, and the last time it happened was in Oct. 2015.”

IJR allocates nearly 36 percent of its combined weight to the industrial and financial services sectors.

What's Next

Investors are clearing betting on more upside for small-cap stocks. To this point in the second quarter, IJR and the iShares Russell 2000 ETF (NYSE: IWM) are two of the top six ETFs in terms of new assets added. On a combined basis, investors have added over $4 billion in new assets to those two small-cap ETFs since the start of the current quarter.

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