The Most Popular ETF The Juice Never Talks About

In recent weeks, we have covered two of the main crises facing the United States. 

The housing crisis. And the retirement crisis. 

Check out The Juice’s archives to read some of those installments.  

Because we like to balance acknowledgement and assessment of these crises with optimism and solutions, we also spend a lot of time discussing investment approaches, strategies and options. 

For example, in yesterday’s Juice, we defined and discussed smart beta ETFs. Tomorrow, we’ll look inside the ETF we featured in that Juice, the Schwab US Dividend Equity ETF (SCHD). 

While SCHD ranks high in Trackstar — over the last month investors have conducted roughly 21,465 searches across the platforms of our 100+ financial media partners — it doesn’t rank as high as the names in today’s Trackstar top five. 

To that end, we’d like to apologize to the family and friends of the iShares Russell 2000 ETF (IWM), as well as IWM itself, for ignoring this popular ETF for so long. We have no excuse other than to say we have been focused elsewhere. Particularly on the leaders of the broad market. 

And, small caps stocks, which are what IWM invests in by passively tracking the Russell 2000 Index, haven’t performed all that well. 

Check out the five-year, one-year, six-month, YTD, and one-month returns for IWM as well as the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ), as of the end of last week. 

Over shorter periods, IWM has become a little more competitive. 

So, as the leaders of the stock market (do we even need to repeat these mega and large cap tech names who also lead AI?) falter here and there, maybe the landscape is shifting. 

One way to illustrate this is by looking at the S&P 500 Equal Weight Index, which tracks the S&P 500 stocks equally, not by market cap. Therefore, the returns aren’t skewed wildly by the biggest names in the index. One of the leading S&P 500 equal weight ETFs is the Invesco S&P 500 Equal Weight ETF (RSP). 

RSP is no longer getting trounced by SPY and QQQ. In fact, it recently hit an all-time high. 

Of course, this doesn’t say much about small caps. But it does say that the market might be spreading out a bit more. So it might make sense to broaden your exposure to a wider swath of stocks beyond the big tech leaders. This includes other large cap stocks, but also small cap stocks. 

Just as there’s some talk about returning to dividend stocks (especially if and when interest rates come down meaningfully) there’s talk that small caps might be on the verge of having their day. 

For example, here’s one take from Fidelity Investments: 

… as of mid-March the Russell 2000 Index of small companies was still about 18% below its all-time peak, which it set in November 2021 …

Of course, the upside of sluggish performance is often more attractive valuations. “The valuation gap between small caps and large caps has been extreme,” says Denise Chisholm, Fidelity’s director of quantitative market strategy …

Chisholm … indicates that small-cap stocks are priced in anticipation of a recession, and could have plenty of room for recovery in a soft-landing scenario. In the past, when valuation spreads have been this wide, the Russell 2000 has produced average returns of almost 40% over the following 12 months, according to Chisholm’s research.

Chisholm thinks “risk-reward tradeoff is very skewed in favor of small caps.” And we agree. 

Her analysis goes on to say: 

Any eventual cut in interest rates—which the Fed has indicated is likely to be on the table at some point this year—might only stack the odds further in small caps’ favor. “Small caps have historically benefited more than large caps from the first rate cut of a cycle,” says Chisholm, based on her research into market history. “And their advantage has been even greater when earnings also improved.” Historically, she says, small caps have beaten large caps more than 75% of the time in periods with similar market dynamics.

Interesting. 

That’s a lot to digest. So, next week, we’ll dig deep into IWM and discuss some of the stocks it owns. We’ll also broaden our small cap coverage by looking at ETFs that own dividend-paying small cap stocks. 

It might be the time to start working these ETFs — or others like them — into your portfolio. 

The Bottom Line: We’re the first to admit that it’s easy to get caught up in the tech leaders powering and leveraging artificial intelligence. This approach makes perfect sense and we think it will continue to, over the long-term, with some bumps in the road. 

Markets, after all, don’t go straight up. Or, they go straight up until they don’t. At least for a little while. 

So, it often makes sense to diversify. We spend a lot of time talking about how to do that with dividend stocks, via ETFs. And now we will start doing likewise by focusing a bit on the small caps. And, as we’ll show next week, you can diversify quite nicely in the space via just a couple ETFs or so.

• 2 Small-Cap Stocks With 40% to 60% Upside
• What Are Smart Beta ETFs?
• 14 Best Financial Sector Dividend Stocks To Invest In
• Check Out The Juice’s Favorite ETF Screener