IWM: Small-Cap ETF Weighed Down by Economic Uncertainty
Large-cap U.S. stocks have been flirting with correction territory, but small-caps have been staring down something worse: a bear market.
Large-cap U.S. stocks have been flirting with correction territory, but small-caps have been staring down something worse: a bear market.
The S&P 500 briefly dipped more than 10% from its recent highs last month, meeting the definition of a correction. But small-cap stocks, as measured by the iShares Russell 2000 ETF (IWM), fell more than 18% from their peak—dangerously close to the 20% threshold that marks a bear market.
IWM vs. CALF
Investors have noticed the divergence. IWM has seen $2 billion in outflows year to date, the sixth-largest pullback of any U.S.-listed ETF in 2024, according to etf.com’s ETF Screener Tool.
The Pacer U.S. Small Cap Cash Cows 100 ETF (CALF), a value-tilted small-cap fund, has also suffered redemptions of $1.9 billion, putting it in the top 10 for outflows this year.
Source: ETF Screener Tool
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Performance has been equally brutal. CALF was down as much as 25% from its highs in March.
On a year-to-date basis, CALF is down 13%, while IWM has lost around 8%. Both have performed worse than the 3% drop for the Vanguard S&P 500 ETF (VOO).
What’s Behind The Weakness?
One culprit may be rising concerns about a tariff-induced economic slowdown. Many small-cap firms are domestically focused and more sensitive to economic turbulence in the U.S. In contrast, the mega-cap companies dominating the S&P 500 are flush with cash, have global footprints and are better positioned to weather macroeconomic headwinds.
But small-caps weren’t exactly on fire before tariffs became a worry.
IWM hasn’t set a new all-time closing high since 2021. Unlike large-cap companies—especially the tech giants powering the S&P 500—small-cap firms have seen little to no earnings growth in recent years. Stagnant profits have translated into stagnant returns.
Small-Cap Comparison
Within the small-cap space, ETF strategies are diverse. IWM tracks the Russell 2000 Index, a broad, market cap-weighted benchmark of U.S. small-cap stocks. Using the etf.com ETF Comparison Tool, we can see that CALF, by contrast, takes a more selective approach, screening the S&P SmallCap 600 Index for companies with the highest free cash flow yields.
Source: ETF Comparison Tool
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That strategy has led to mixed results. Since its launch in 2017, CALF has returned 71% versus 59% for IWM. However, it hasn’t outperformed its own benchmark—the S&P SmallCap 600 Index—which is also tracked by the iShares Core S&P Small-Cap ETF (IJR). Both CALF and IJR are up roughly the same amount since mid-2017.
Whether these funds can bounce back may depend on whether economic growth reaccelerates and whether small-cap earnings can finally start to catch up.
