Thanks to the vaccination rollout and with the falling number of Covid-19 cases, the US economy is fast gearing up to face the opportunities in the post-pandemic world. And, with the turn in the economy, small-cap companies which are closely tied to the US economy, could be in a better position to ride the upside when the situation improves. While the economic challenges may still remain, the pent-up demand and the opening of the sectors are expected to help corporates shore up their earnings.
The potential of US stocks to reach new heights remains an unchartered territory and investors globally are gearing up to latch on to the upcoming opportunities.
For a stock market investor, the big universe of small companies has always been a hunting ground for multibaggers. After all, the small-caps turn into mid-caps, later transform themselves into large-cap and in the process generate huge wealth for the shareholders.
So, if you as an investor wish to diversify across small-cap US stocks, the go-to index is the Russell 2000, comprising 2000 small capitalization companies. But, if identifying the right small-cap stock is a concern, how about owning the entire bunch of Russell 2000 stocks.
Getting exposure to an entire lot of Russell 2000 stocks is possible through the exchange-traded fund (ETF) – iShares Russell 2000 ETF. The iShares Russell 2000 ETF ticker is IWM and the price (NAV) is currently around $223.
ETF is a sort of variant of a mutual fund that tracks a specific index. The units in an ETF can be bought or sold only on a stock exchange anytime during trading hours. ETF’s are low-cost investments and allow one to take exposure in several stocks of the same index at one time. They come in various forms and typically track different indexes and sectors. Similar to stocks, they even have their specific Ticker symbol.
What is iShares Russell 2000 ETF
The iShares Russell 2000 ETF (IWM) tracks the same set of stocks in a similar proportion and weightage as that of the Russell 2000 index. The fortune or the performance of iShares Russell 2000 ETF is, therefore, directly proportional to the performance of the index it tracks, which is Russell 2000. By investing in iShares Russell 2000 ETF (IWM), you get access to 2000 small-cap domestic stocks in a single fund.
Even though the past performance is no guarantee that the fund will continue to perform in a similar manner, the iShares Russell 2000 ETF has been able to generate decent returns over different tenures.
From the lows of 101.40 witnessed in March 2020, the iShares Russell 2000 ETF has reached a level of 223.35, as on May 26, 2021. Over the last 12-months, the Russell 2000 index is up by about 56 per cent as compared to 38 per cent generated by S&P 500 index during the same period.
Interestingly, the YTD return of Russell 2000, the index that the ETF is benchmarked against, is about 14 per cent compared to 11.71 per cent of S&P 500, the leading US index representing a broader economy.
As on March 31, 2021
Technically, the iShares Russell 2000 ETF (IWM) appears to be interestingly poised. Probably in its third or fourth attempt, the small-cap ETF Russell 2000 (IWM) has been able to clear through 50-Day Moving Average (DMA) resistance that was considered around $222.14. For a large part of last 12-months, the NAV remained above the 50 DMA, reflecting in its rising price. As on May 28, the price reached $225.68.
Source: Yahoo Finance
The small-cap stocks are more volatile in nature and the stock prices may show sharp movements especially over short-term. Compared to mid-cap or large-cap companies, they are relatively less researched, less liquid and away from the investing radar of large global institutions and investors. The risk-reward ratio is, therefore, high and holding them individually or through ETF should be over a longer time horizon.
The iShares Russell 2000 ETF (IWM) has an inception date as May 22, 2000, and the fund is listed on NYSE Arca Exchange. The benchmark Index of ETF is Russell 2000 Index and the total AUM of iShares Russell 2000 ETF (IWM) is close to $66 billion.
Top Stocks and Sectors of ETF
Buying into iShares Russell 2000 ETF (IWM) means you are allocating your capital into the various sectors of the US economy. The top 5 sectors in this ETF include Healthcare, Industrial, Financials, Consumer Discretionary, Technology. Some of the top companies in which your funds will get allocation through iShares Russell 2000 ETF (IWM) includes Plug Power, Gamestop, Penn National Gaming, Caesars Entertainment, Deckers Outdoor, Builders Firstsource, Novavax, Sunrun, Darling Ingredients, Mirati Therapeutics and Ultragenyx Pharma amongst others.
Over the long term, the level of portfolio diversification is an important yardstick to determine the risk-adjusted returns to an investor. And, not just across asset classes, it’s essential to diversify across geographies too. Here’s why you need to allocate your money to international stocks. While the frontline FAANG stocks may continue to form the core of your foreign portfolio, the exposure to small-cap stocks through the iShares Russell 2000 ETF (IWM) may work as a kicker for your long-term goals.
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