US Small-Cap ETF Gains Best In A Decade

November 13, 2013

IWM is a stellar performer, but its flows lately have turned negative.

Risk-seeking investors have put U.S. small-cap stocks on track to deliver their best annual performance since 2003. The iShares Russell 2000 ETF (IWM | A-79) is up 30.98 percent year-to-date, outpacing large-cap U.S. stock indexes like the S&P 500, which is up roughly 26 percent in the same period.

The last time the Russell 2000—the marquee index for small-caps underlying IWM—rose more than 30 percent in a year was in 2003, when it jumped 47.3 percent.

1_IWM_SPY_YTD_Perf

Chart courtesy of StockCharts.com

It’s unsurprising to see small-cap stocks shine in a year when the broad stock market has rallied to new record levels given that companies of smaller market capitalization tend to be more responsive, or more sensitive, to market movement. That's partly because they are said to be more closely in tune with broad domestic themes.

More to the point, small-cap stocks can also be good income-generating investments—something many investors have looked for in an environment where ultra-low interest rates have all but dried up traditional sources of income in the bond market.

In a recent blog, WisdomTree’s Director of Research Jeremy Schwartz went as far as saying that small-cap stocks, contrary to common market perception, can be good dividend-payers.

“Many investors wrongly assume that small-cap companies can’t afford to pay dividends because their main focus is on growth and they need to reinvest their earnings to support that growth,” Schwartz said in the blog. “We feel this view stereotypes all small-cap companies, and there are many small-cap companies that have proven business models with relatively stable earnings streams.”

“These companies have the ability to pay out dividends to shareholders and grow them over time,” he added. “Adding exposure to small caps can offer increased diversification and return potential but also potentially increase overall portfolio yield.”

Interestingly, asset flows into U.S. small-cap funds have been inconsistent, even if in the aggregate, have proven to be one of the strongest year-to-date inflows the segment has ever seen.

 

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