When navigating the ever-changing financial markets, the search for better performance usually leads to different asset classes and vehicles. One such interesting category is the small cap segment, represented by the Russell 2000 index and its associated investment vehicle: the iShares Russell 2000 ETF (IWM).

Before moving into this area, I wish to compare the performance of the “IWM” ETF with the benchmarks of the Nasdaq Index ETF and the S&P 500. And for proper analysis, I do so over the most recent period and over a long historical period.

What is the iShares Russell 2000 ETF (IWM)?

The iShares Russell 2000 ETF (IWM) is an exchange-traded fund that tracks the Russell 2000 index.

Consequently, an interesting ETF because the Russell 2000 serves as a barometer for the U.S. small cap equity market. The Russell 2000 index consists of the 2,000 smallest companies of the larger Russell 3000 index. This is exactly why we refer to it as: the small cap segment.

Growth potential

One of the biggest advantages of the IWM ETF is its growth potential. Small cap companies naturally have more room for expansion and can often outperform their larger counterparts. Moreover, small-cap stocks are generally less widely followed by analysts and investors. This is already a good thing because this, in turn, provides opportunities for active and savvy investors to identify undervalued gems.

Recent performance: IWM vs. Nasdaq and S&P 500

Over the past few months, the performance of the iShares Russell 2000 ETF (IWM) versus the Nasdaq and S&P 500 has been striking. On an annualized basis, the IWM currently has a 6.5% return, while the Nasdaq Composite is up 21% and the S&P 500 is up 18%.

This means that the small cap segment – represented by the Russell 2000 index – has seriously lagged during this period. Still, it is important to note that the performance of small cap stocks is more volatile and cyclical in nature compared to their large cap counterparts.

One factor contributing to the IWM’s recent underperformance is the market’s focus on large cap, growth-oriented technology stocks that dominate the Nasdaq. These reputed high-flyers, with their ever-increasing weight within the index, set the tone of the broader market’s performance over the past 8 months.

Long-term performance: IWM vs. Nasdaq and S&P 500

Looking at the long term, the iShares Russell 2000 ETF (IWM) often outperforms the broader market indexes. The above shows that small cap stocks can therefore also perform well over the long term.

The cyclical nature of small cap stocks means they can be more sensitive to changes in economic conditions and investor sentiment.

During periods of economic expansion and risky market environments, small cap companies have historically tended to outperform their large cap counterparts. Conversely, during times of market volatility or economic uncertainty, small cap stocks may underperform as investors seek the relative safety of larger, more established companies.

Factors affecting small cap performance

Several important factors can affect the performance of small cap stocks and the IWM ETF. One of the most important factors is the overall health of the economy. When the economy is growing and consumer spending is strong, small cap companies tend to thrive because they tend to be more flexible and responsive to changing market conditions.

Another important factor is interest rates. Rising interest rates can put pressure on small cap companies, which often have higher levels of debt and may struggle to repay their loans in a higher interest rate environment. Conversely, falling interest rates can give a tailwind to small cap stocks, making it easier for them to access capital and invest in growth opportunities.

Market sentiment and investor risk appetite also play an important role in the performance of small caps. When investor confidence is high and risk tolerance is high, small-cap stocks may outperform as investors look for opportunities for more growth. Conversely, during periods of market uncertainty or risk aversion, investors may prefer the perceived stability of large cap stocks, leading to underperformance for the small cap segment.

Investing in the IWM ETF – a star small cap index!

For investors seeking exposure to the small cap segment of the U.S. stock market, the iShares Russell 2000 ETF (IWM) may be an attractive option. The ETF provides diversified access to a wide range of small-cap companies, offering growth potential and portfolio diversification. A European counterpart is the Amundi Russell 2000 – ticker RS2K.

Because of its cyclical behavior, it is admittedly essential to buy IWM technically and for the long term. By trading technically consistently you avoid short-term underperformance. You can do this, for example, with a long-term average combined with support and resistance lines.