Here's The Best Way To Play The Sell-Off In Small-Cap Stocks

The Russell 2000 small cap stock index recently experienced its first correction of at least 10% since the COVID-19 pandemic began in early 2020.

The index has retreated about 12% from its highs in late November, but investors looking to buy the dip in small cap stocks have several factors to consider.

Small Cap Pullback: On Tuesday, Bank of America analyst Jill Carey Hall discussed the small cap correction and why small cap stocks may not yet be in the clear. Hall said one of the reasons small cap stocks have significantly underperformed large-cap stocks in 2021 has been ongoing COVID-19 risks.

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“While our Biopharma team doesn’t expect Omicron to change the course of the pandemic, broader shutdowns or any major resurgence that could derail the services recovery would support more caution on small [cap stocks],” Hall said.

How To Play It: Biotech stocks have performed particularly poorly in 2021. Hall said there are various reasons why biotech stocks are lagging, including a lack of M&A drivers, disappointing data readouts, investor perception of a tougher FDA and COVID concerns negatively impacting clinical trial enrollment.

Looking ahead, Hal said high-quality small cap stocks have outperformed 100% of the time during the late stages of economic cycles. Therefore, Bank of America is more bullish on the S&P 600 small-cap index than the Russell 2000.

Hall said The S&P 600 has a higher percentage of profitable companies. It also has less exposure to the biotech industry and more exposure to her preferred market sectors.

Benzinga’s Take: Hall’s preference for the S&P 600 over the Russell 2000 has paid off so far in 2021. The iShares Core S&P Small-Cap ETF IJR has generated a year-to-date total return of 22.2%, roughly double the year-to-date total return of the iShares Russell 2000 ETF IWM.

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