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Here’s What’s Powering Small Caps’ Post-Trump Surge

Tuesday, November 22, 2016 11:01
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Today we discuss the demand that has surrounded Small-Cap ETFs since Trump’s election, as evidenced by very heavy trading volume and inflows in the largest fund in the segment.

The best-known fund in the space, IWM (iShares Russell 2000, Expense Ratio 0.20%, $36.1 billion in AUM), has pulled in a massive $4.7 billion in just the trailing one-month period. Meanwhile, the second largest fund in this segment, which debuted on the same day as IWM back on May 22, 2000, has also benefitted in the recent demand for Small-Cap stocks.

The fund in question is IJR (iShares Core S&P Small-Cap, Expense Ratio 0.07%, $24 million in AUM). Not only is IJR the cheaper of the two ETFs in terms of expense ratio (and significantly so), but historically it has handily outperformed IWM head to head as well in multiple time frames.

IJR is the better-performing fund going back to inception and in various comparative time frames, such as trailing 10 year performance, trailing 5 year performance, trailing one year, year-to-date, trailing 6 month, 3 month, and 1 month. Of course the two underlying portfolios are not identical, as IWM is based on an index of two thousand stocks while IJR follows the S&P SmallCap 600 Index (six hundred stocks).

When we look at which sectors are powering small-cap stocks higher here in the short term, we see that the highest sector concentrations within IJR are as follows: 1) Industrials (18%), 2) Technology (17%), 3) Financial Services (16%), 4) Consumer Discretionary (14%), and 5) Health Care (10%).

IWM’s underlying sector exposure is different to some degree, which along with other factors related to index inclusion criteria may explain the differences in performance in the two portfolios over time: 1) Technology (17%), 2) Financial Services (17%), 3) Industrials (14%), 4) Consumer Discretionary (12%) and 5) Health Care (12%).

Given the nature of both of these underlying indexes in that they are very deep (600 versus 2,000 stocks), it is interesting to periodically look at top individual holdings within these funds to get a sense of whom the “market movers” may be within the Small-Cap space, especially given the magnitude of this move there post-election. Successful Small-Cap companies may of course “graduate” to the Mid-Cap or even Large-Cap space at some point in the future that is if they are not acquired first by a larger competitor, so both of these funds can be seen as the breeding grounds for innovation in a sense.

Top holdings in IWM are a blast from the past, and formerly a “Larger-cap” stock than its current state include #1 holding AMD (0.33%), followed by 2) MSCC (0.29%), 3) AZPN (0.25%), 4) CW (0.24%), and 5) IDA (0.23%). IJR’s top holdings are, as one might expect, very different: 1) TTWO (0.62%), 2) PDCE (0.56%), 3) CC (0.51%), 4) LFUS (0.50%), and 5) SLCA (0.48%).


Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, Paul Weisbruch, does not endorse or recommend any issuer or security mentioned herein.

About the Author: Paul Weisbruch
paul-weisbruchPaul Weisbruch is the VP of ETF/Options Sales and Trading at Street One Financial. Prior to joining the team at Street One, Paul served as the Director of RIA and Institutional ETF Sales at RevenueShares ETFs from December 2007 until November of 2009. Before RevenueShares, Paul was employed by Susquehanna International Group from 2000 until 2007 serving in roles including OTC/NYSE Institutional Block Trading, Nasdaq/OTC Market Making, ETF/Derivatives Intelligence and Strategy, Algorithmic Trading, as well as acting as the PHLX Floor Specialist in the ETFs, SPY and DIA.

Paul has been actively involved in the ETF space from both a product and trading standpoint since 2000. Additionally, Paul has well forged relationships with national RIAs, institutional pension fund managers and consultants, mutual fund and hedge fund managers, and also the ETF media. Co-authoring the “S1F ETF Daily” since 2009, the daily piece has become a must for many portfolio managers in the ETF space, with segments regularly appearing in the likes of Barron’s, WSJ, and for instance.

He holds his Series 4 (Registered Options Principal), 6, 7, 55 (Equity Trader), 63, and 65 licenses. He graduated from the University of Pittsburgh (B.S. – Economics), graduating magna cum laude, and has an MBA from Villanova University.

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