The Case For Small Cap ETFs In 2017

January 27, 2017

There seems to be a number of key trends fueling a case for small-cap investing this year. A look at how some of the more than 100 small-cap ETFs have done in recent weeks—particularly post-presidential  election day in the U.S.—does, in fact, point to significant outperformance relative to larger-cap names.

Simply put, what’s changed is the macroeconomic environment, according to Bob Doll, chief equity strategist for Nuveen Asset Management.

Doll, speaking earlier this week at Inside ETFs, argued that a move to nationalism in the U.S. and increasingly across the globe; a pickup in inflation after years of talk of disinflation; a transition from monetary easing to fiscal stimulus; and a rise in volatility should all help reshape investment goals toward more risk, more volatility and total return.

End Of Earnings Recession

Also important is the end of what was considered an earnings “recession” lasting six-consecutive quarters ending in the third quarter of 2016. Now, earnings growth—tied to an improving economy, tax and regulation reform, and pent-up demand—is a tail wind for stocks, he says.

The implication of these trends is that small-caps should outperform large-cap names because they’d offer a front-row seat to domestic earnings as opposed to the more globalized earnings tied to large-cap stocks.

Consider the performance of the largest U.S. small-cap ETF in the market, the iShares Russell 2000 ETF (IWM) versus the SPDR S&P 500 (SPY) in the past 12 months. Note the jump following the outcome of the presidential election, and the 14-percentage-point difference between the two funds: 

 

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