Investors Flee Small Cap ETF Giant

U.S. small-cap ETFs can’t seem to catch a break. Consider what’s happening with the largest small-cap ETF, the iShares Russell 2000 (IWM | A-92), which has $24 billion in assets. The fund has been anything but popular with investors this year.

IWM, which many see as a proxy for the small-cap ETF space, has already faced some $540 million in net redemptions in January—and we are only halfway through the first month. The bleeding is showing no signs of stopping either. There are already February put options activity pointing to more weakness ahead, Paul Weisbruch, VP of ETF/Options Sales and Trading at Street One Financial, tells ETF.com.

To be fair, IWM isn’t alone. Other small-cap ETFs, such as the Vanguard Russell 2000 (VTWO | A-91) or the $15 billion iShares Core S&P Small-Cap ETF (IJR | A-92) and the $10 billion Vanguard Small-Cap (VB | A-99), to name a few, have also faced net redemptions this year.

IWM’s struggles are largely centered on performance. Year-to-date, the fund has dropped about 10%, which, in and of itself, is noteworthy. But it’s also almost twice as deep the decline as large-cap funds such as the SPDR S&P 500 (SPY | A-98) have seen.

Many investors turn to small-cap stocks for their risk/reward profile. These securities are often said to be more in tune with domestic themes and more sensitive to economic environments, which means they can be more volatile, but they can also deliver outsized returns.

Unfortunately, IWM hasn’t done that in a while. While no one seems to be pointing the finger at one single event behind the segment’s weakness, there’s a general sense that: the global economy is in trouble; oil prices are still declining; China is sending chill waves across the globe; and market volatility promises to be high this year.

In other words, there’s little to foster investor confidence these days.

In the trailing 12 months, IWM underperformed large-cap equities by 10 percentage points, as the chart below shows:

Long-standing Underperformance

Charts courtesy of Stockcharts.com

“Quite simply, investors in theory expect to ‘be compensated’ for additional risk and volatility when taking equity exposure in portfolios,” Weisbruch said.

“Specifically in this case, if they are or were holders of small-cap stocks as compared to large-caps, we just have not seen this play out in reality in the trailing five-year period,” he added. “This likely has caused many to re-evaluate portfolios and perhaps scrap small-cap exposure for large-caps.”

Contact Cinthia Murphy at [email protected].