Signs Of A Return To Small-Cap ETFs

One of the most vexing scenarios facing investors this year has been the ongoing disappointment delivered by U.S. small-caps and the corresponding exchange-traded funds. For instance, the iShares Russell 2000 ETF IWM is up just 2.3 percent year to date, well behind the 10.5 percent returned by the S&P 500 and a pitiful showing when measured against a host of international small-cap ETFs.

For most of this year, investors have shown little patience with U.S. small-cap ETFs. IWM, the largest ETF dedicated to smaller U.S. stocks, has bled $1.86 billion in assets, a total surpassed by just three other ETFs. However, data suggest investors are starting to revisit small-cap ETFs.

“Traders added $2.6 billion to the biggest exchange-traded fund invested in small caps this week through Thursday, after two weeks of outflows,” according to Bloomberg. 

Better In The Third Quarter

While IWM is still saddled with a large year-to-date outflows number, that situation has been getting better in third quarter. Since the start of the current quarter, IWM has added more than $285 million in new assets. Investors have also been warming to the iShares Core S&P Small-Cap ETF IJR in the third quarter, as that ETF has added nearly $750 million in new assets.

IJR, which tracks the S&P SmallCap 600 Index, is slightly lower year to date. Due to their domestic focus, small caps are struggling against the backdrop of the weaker dollar this year. The U.S. Dollar Index is down 9.3 percent, underscoring the point that the dollar is one of the worst-performing major currencies in the world this year.

“Tax reform could also help lift smaller companies that are seeing a weaker dollar erode profits. Small caps posted flat earnings in the second quarter, compared with a 10 percent jump for large-cap firms, according to Steven DeSanctis, an equity strategist at Jefferies,” reports Bloomberg.

Enthusiasm For Leverage

Some traders are not shying away from playing a potential small-cap rebound with leveraged ETFs, such as the Direxion Daily Small Cap Bull 3X Shares TNA. TNA attempts to deliver triple the daily returns of the Russell 2000 Index.

Over the past month, TNA has been averaging daily inflows of almost $7.9 million, according to Direxion data. Conversely, TNA's bearish counterpart, the Direxion Daily Small Cap Bear 3X Shares TZA has been averaging daily outflows of almost $1.6 million over the same period. 

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