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.


Chart courtesy of

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.


IWM Inflows And Outflows

Take IWM, for instance—the market’s largest U.S. small-cap ETF with more than $25 billion in total assets. As recently as mid-October, IWM, which replicates the Russell 2000 index, was on track to being the second-most-popular ETF in 2013 thanks to net inflows of about $6.3 billion in the first 10 1/2 months of the year—the second-largest net creation in the ETF market at that point.

But the fund went on to end October with net asset losses of $1.69 billion that month alone, and so far in November, investors have already yanked a net of $3.4 billion from IWM—that’s a net asset loss of $5.17 billion in roughly six weeks.

The latest bleeding has all but erased its recently stellar asset inflow track record, which now amounts to only $1.4 billion in net inflows year-to-date. If you count November-to-date as a month, IWM has now bled assets in four out of 11 months so far this year.

To be fair, in a broader sense, investor demand for small-cap exposure has been strong in 2013, despite the month-to-month fluctuation.

As of Oct. 31, some $12.3 billion in assets had flowed into ETFs and mutual funds linked to the Russell 2000, Russell 2000 Growth and Russell 2000 Value Indexes since the beginning of the year, according to Russell Indexes data.

More specifically, ETFs tied to the Russell 2000 Index had gathered a combined $10.2 billion in fresh net assets through the end of October—an all-time record for this time period.

These funds, anchored by IWM, include the likes of the $300 million Vanguard Russell 2000 ETF (VTWO | A-85) and the newcomer $13 million SPDR Russell 2000 ETF (TWOK), to name a few. In all, there are more than 40 ETFs tapping directly into the U.S. small-cap equity space.

Now, since the end of October, IWM has faced sizable asset outflows—some $3.4 billion November-to-date, to be exact, which could raise questions as to whether the run in small caps is coming to an end. But as IndexUniverse’s Dave Nadig, head of Analytics, would say, asset flows are not an indicator of performance, and in this case, IWM has indeed continued to rally despite the asset bleed.

Since the beginning of the month, IWM has gained 0.25 percent, nearing its $111.35/share closing price—its highest ever—seen in late October.


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