ETF Performance Reflects The Strength Of Micro-Caps In 2018

Smaller stocks and corresponding exchange traded funds have recently been enjoying renewed fanfare and rightfully so. Year-to-date, the iShares Russell 2000 ETF IWM is up 9.6 percent, or double the gains of the large-cap S&P 500.

Smaller small-caps, or micro-caps, are performing even better. The performance of the iShares Micro-Cap ETF IWC confirms as much.

What Happened

The $1.03-billion IWC is higher by 11.3 percent year-to-date. IWC, which is nearly 13 years old, tracks the Russell Microcap Index.

IWC's underlying index is “exceeding the performance of Russell U.S. indexes measuring small-, mid-, large- and mega-cap stocks,” according to new research from global index provider FTSE Russell.

IWC holds 1,359 stocks. At the end of April, the average market capitalization of the Russell Microcap Index's components was $657 million.

Why It's Important

The domestic focus of smaller stocks is helping the asset class, a scenario that is benefiting micro-caps as well.

“Being more domestic has insulated micro-caps from trade tensions, geopolitical worries and the earnings drag stemming from a stronger dollar,” said FTSE Russell Managing Director Alec Young.

The less global nature of micro-caps gives more exposure to positive trends such as tax reform, deregulation and faster U.S. economic growth, Young said. 

"All these tailwinds are helping drive faster profit growth for micro-caps relative to their blue chip counterparts, helping fuel YTD leadership.”

Translation: the strong dollar that weighs on multinational large-caps is not much of a burden for micro-caps.

What's Next

Not surprisingly, IWC has a growth feel. Health care names, most of which are biotechs or pharmaceuticals companies, represent over one-quarter of the fund's weight, while the technology sector is 13 percent of IWC's weight.

Still, IWC's annualized volatility to this point in 2018 has been slightly less than the small-cap IWM's. Over the past three years, IWC has been barely more volatile than IWM. Since the start of the current quarter, investors have added nearly $55 million to IWC.

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