Why Small Cap ETFs Poised To Pop

July 12, 2019

Assets Flowing In, Mostly

There are 123 small cap ETFs commanding more than $210 billion in total assets today. Among the biggest U.S.-focused funds are a pair of iShares ETFs, the iShares Core S&P Small Cap ETF (IJR) and the iShares Russell 2000 ETF (IWM), which together have nearly $90 billion in combined assets. The Vanguard Small-Cap ETF (VB) has $25 billion.

Investors have been pouring money into small cap ETFs, but are showing a preference for the cheapest strategies with decent liquidity. IJR, for instance, has taken in $2.2 billion in net new money in 2019. IWM, on the other side, has bled $4.2 billion in net redemptions. IJR costs less than half IWM’s price tag: 0.07% versus 0.19% in expense ratio.

IWM is the liquidity maven in this segment, with average daily trading volume of about $2.7 billion, but IJR trades a solid $200 million on average every day.

Price AND Liquidity

The appetite for IJR has come even as the fund has underperformed IWM this year, and it could be because the fund offers ample liquidity at a competitive price.

IJR has underperformed other competing small cap ETFs, including the cheapest U.S. small cap ETF, the $8 billion Schwab U.S. Small-Cap ETF (SCHA), which costs 0.04%, and VB, which costs 0.05%.

SCHA and VB have also attracted assets this year, but not as much as IJR, even as they significantly outperformed IJR’s returns. Nearly $480 million and $400 million in net inflows, respectively, have flown into SCHA and VB year to date.

Much like we see in other pockets of the ETF universe, price matters a lot to most ETF investors, but so does liquidity.


Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]

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