Proprietary Data Insights
Financial Pros’ Top Small Cap ETF Searches in the Last Month
Small Cap Run Sparks Financial Pro Interest in This ETF
Traditionally, small cap stocks offer higher risk and higher reward.
But that isn’t always true of the small cap indexes or ETFs.
You see, once a small cap stock grows large enough, it gets bumped up to the mid-cap category.
So, indexes like the Russell 2000 are self-selective.
That’s why they’re usually not good investments unless you believe in a broader economic boom.
Maybe that’s what markets are telling us as the once lagging iShares Russell 2000 ETF (IWM) has begun to outperform some tech indexes.
Not to be left behind, financial pros began looking into this ETF in earnest back in late May, with search volume increasing week after week.
That’s why we wanted to take a look at the IWM and some competing small cap ETFs to find the best of the bunch.
Key Facts About IWM
The IWM is the most broadly traded and liquid small cap ETF in the market.
Following the Russell 2000 index methodology, the IWMincludes the 2,000 smallest companies by market capitalization from the Russell 3000 index. Companies are weighted based on market cap, and the index is reconstituted annually.
Because stocks are removed once they exceed a certain threshold, the weighting for each company remains fairly balanced, with no company accounting for more than one half of one percent of the total index.
What most people don’t realize is the IWM holds more regional bank stocks than other indexes like the S&P 500.
This gives it a much heavier weighting towards financials than technology.
Over the last 20 years, small caps vastly underperformed mid and large cap indexes.
The Great Recession and subsequent banking reforms made it more difficult for regional banks to grow. As such, the IWM underperforms other indexes except when coming out of recessions.
To give you an idea, the S&P 500 ETF (SPY) gained over 70% during the last five years.
Small cap stocks come in all shapes (not so much sizes, pun intended). The following are some alternatives to the IWM from Blackrock, State Street, and Vanguard.
The winner of the 5-year return happens to be Vanguard, where its lower cost helped it outperform the other ETFs.
It’s also worth noting the ‘growth’ small cap ETFs don’t outperform the baseline ETFs.
Our Opinion 7/10
While the IWM has plenty of liquidity, we can’t argue with the outstanding performance of the VB amongst small caps.
And with a lower expense ratio, it’s one of the few Vanguard ETFs we like for its niche.
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