Small-Cap Risk Leads US Equity Factor Returns Year To Date

Small-capitalization shares are having a good year. It’s only mid-February, but year-to-date results continue to show a strong performance edge in favor of smaller stocks in the US equity space, based on a set of exchange-traded funds through yesterday’s close (Feb. 10).

Within the small-cap bucket, growth is on top. The iShares S&P Small-Cap 600 Growth ETF (IJT) is up an impressive 16.4% so far in 2021. Earlier this week, the fund closed at a record high before pulling back in yesterday’s session.

The core and value slices for small caps are in close pursuit, posting this year’s second-and third-best performances, respectively, in the equity factor realm.

Small caps are also posting impressive performance in relative terms vs. the market overall. The roughly 14% to 16% year-to-date rally in various flavors of small caps represent gains that are far above the broad market’s 4.3% increase, based on SPDR S&P 500 (SPY).

The bullish breakout in small caps “is a positive signal, though it does lose some of its bullish impacts due to the [Russell 2000 Small Cap] index already being so extended,” advises technical analyst Andrew Adams of Saut Strategy in a research note published yesterday.

The weakest factor performer this year: low-volatility. The iShares MSCI USA Min Vol Factor (USMV) has struggled to keep pace with the general rise in equities this year, leaving USMV essentially unchanged year to date.

Motley Fool notes that defensive stocks, including the low-vol factor, have had a tough time in the wake of last spring’s coronavirus crash:

The stated objective of these ETFs was to invest in stocks whose price movements had historically been less volatile than the overall market. As iShares put it, those stocks have “potentially less risk,” and historically, those stocks had declined less than the overall market during downturns.

Yet when the coronavirus bear market happened in early 2020, it turned all the old rules on their head. As a result, low-volatility stocks failed to deliver on the expectation that they’d suffer less dramatic hits than their higher-volatility peers

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