Market Overview

What To Make Of Small-Cap ETF Flows

What To Make Of Small-Cap ETF Flows

Flows into and out of exchange traded funds can be instructive, but not always predictive. There are frequently instances of ETFs experiencing significant departures while those funds climb.

The iShares Russell 2000 ETF (NYSE: IWM) is a prime example of an ETF that's surging while enduring hefty departures.

What Happened

IWM, the largest ETF dedicated to small-cap stocks, is up 15.58 percent year-to-date, but investors have pulled $3.89 billion from the fund. Only two U.S.-listed ETFs have seen larger year-to-date outflows.

Some investors may view outflows from IWM as a worrisome sign, and they're not entirely off-base in that thinking. Last year, small-cap stocks and ETFs entered bear markets before large-cap rivals, providing what proved to be an accurate warning about what was to be an ugly fourth quarter for stocks across all market capitalization segments.

Why It's Important

IWM's growth and value counterparts, the iShares Russell 2000 Growth ETF (NYSE: IWO) and the iShares Russell 2000 Value ETF (NYSE: IWN), have also been beset by outflows this year. Year-to-date, outflows from IWO and IWN are $626.41 million and $538.62 million, respectively. IWN and IWO are up an average of 15.87 percent this year.

To the point of investors often having knee-jerk reactions to ETF outflows: U.S. ETFs hauled in a combined $37 billion last week, an epic week by industry standards. IWM added $1.15 billion in assets for the week ended March 15, good for the tenth-best total among U.S. listed ETFs.

Data pertaining to leveraged small-cap ETFs do not indicate sizable bearish positioning. Sure, the Direxion Daily Small Cap Bear 3X Shares (NYSE: TZA), which tries to deliver triple the daily inverse performance of the Russell 2000 Index, saw inflows of $12.58 million for the 10 days ended March 15.

For the five days ended March 15, traders poured $9 million into TZA's bullish cousin, the Direxion Daily Small Cap Bull 3X Shares (NYSE: TNA).

What's Next

Some market observers believe there are valid reasons why small caps are surging this year while outpacing large caps.

“Although YTD gains have extended to both large caps and small caps, it’s no surprise the more economically sensitive Russell 2000 Index has outperformed as economic optimism has reasserted itself,” FTSE Russell Managing Director Alec Young said in a recent note.

“Positive cyclical catalysts have included a dovish Fed policy pivot, a resilient U.S. consumer, hopes for easing U.S.-China trade tensions and a soft Brexit. Another factor favoring the Russell 2000 has been its lower 20-percent international sales footprint at a time of increased foreign economic uncertainty and dollar strength.”

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