Small-Cap ETFs Bask In Post-Election Limelight

Small-cap stocks and exchange-traded funds have been obvious leaders since the November 8 presidential election, a pointed confirmed by the widely followed Russell 2000 hitting an all-time high Monday.

Speaking of all-time highs, 151 ETFs accomplished that feat Monday with approximately 30 being small-cap funds. The $23.9 billion iShares S&P SmallCap 600 Index (ETF) IJR was one of those 30 small-cap ETFs. On the back of a substantial post-election move higher, IJR is up 10 percent this month and 21.6 percent year-to-date.

As their names imply the Russell 2000 and the S&P SmallCap 600 Indexes hold about 2,000 and 600 stocks, respectively. With such a wide discrepancy in the number of holdings it is reasonable to expect, particularly over longer holding periods, that these small-cap benchmarks will produce returns that are nowhere close to each other. The Russell 2000 has been a solid performer this year, but its 18.5 percent return trails that of the S&P SmallCap 600 Index, IJR's underlying benchmark.

Investors have eagerly shifted to riskier small caps away from defensive plays following the election.

Strategist's Take

According to Sam Stovall, chief investment strategist for CFRA, “these performances are likely based on two things: 1) the exiting of positions placed ahead of the highly expected Democratic victory, and 2) the speculation that on a macro level the new Trump administration’s policies will lead to higher U.S. GDP and EPS growth, due to a sharp increase in infrastructure spending, a resulting acceleration in the Fed’s rate-tightening timetable, and a strengthening of the U.S. dollar,” said CFRA Research in a note out Monday.

Passive Small-Cap ETFs

Passive small-cap ETFs, such as IJR, and related index funds are popular with investors of all stripes for other reasons, including the inability of many active small-cap managers to beat their benchmarks. For the year ended June 2016, just 4 percent of active small-cap managers outperformed the S&P SmallCap 600 Index, but the average annual fee on a U.S. active small-cap fund is 1.2 percent per year, or $120 on a $10,000 investment.

After a recent fee cut, IJR charges just 0.07 per year, or $7 on a $10,000 stake. There has also been a noticeable increase in demand for IJR since the election.

“Demand for small-cap ETFs has been strong, with IJR alone pulling in $818 million since November 8, according to data on etf.com. The $24 billion ETF traded on average 1 million shares in the last six months, but volume spiked to 1.5 million shares in the last month,” said CFRA.

The research firm has a Market-Weight rating on IJR.