By: Bill Spencer — July 26, 2020
Small-Cap Sunday - Here's 2 Small-Cap ETFs to Play for Double Digit Returns
Thanks for stopping by.
Today we're going to look at two popular ETFs that track the small-cap investing space.
Each has its merits, but both are excellent for gaining bullish exposure to firms in the $300 million to $5 billion market cap range.
Before we jump into all that though, let's jump back and look at how the market fared over the past week.
While the large- and mega cap tickers were declining, one of our small-cap proxies was advancing.
The S&P 600 (SML) rose a bit more than half a percent. And while our other proxy, the Russell 2000 (RUT) fell by -0.39%, it still outperformed the Dow Jones (-0.75%) and the Nasdaq Composite (-1.33%).
(Click any image to enlarge)
That decline in the tech-heavy Nasdaq is notable for what it might be telling us about the state of the market.
The market's stunning advance since bottoming on March 23rd has been driven by giant tech firms, the Googles, Facebooks and Amazons of the world.
Any weakness in tech could spell weakness in the overall market.
Earlier this week ("How to Guard Against a Wreck in “Big Tech”) my friend and colleague Costas Bocelli has this to say about the tech sector:
“Technology is obviously the most overbought segment of the market and the most heavily crowded in the marketplace. Investors piling into high-tech growth have benefited from the bullish momentum.
But one has to wonder: How much more is left in the tank before we reach buyers' exhaustion? That’s anyone’s guess.
But let me tell you that the conditions for a “downside correction” are firmly in place."
I've learned to take Costas' insights very seriously over the years, and I'm not surprised to see his most recent call starting to play out in the real stock market.
Speaking of which...
Our #1 risk barometer, the New York Stock Exchange Bullish Percent Index (NYSE BPI) made a significant move this past Friday.
After spending 43 days in a column of O's (indicating the market is weak in the short-term) the chart flipped into X's (indicating strength in the short term).
The NYSE BPI is so central to the "true market" way of investing that we've created an entire website dedicated to tracking its every important move.
You'll find more detail about the BPI there, so you should bookmark that page and refer to it frequently.
Earlier we looked at how our two small-cap proxies performed over the past week.
We saw that small-caps came in #1 and #3 in a ranking of the five major indices.
Now let's look at how to play small-cap strength.
iShares Core S&P Small-Cap ETF (IJR) tracks the investment results of the S&P 600. Typically, this ETF invests at least 90% of its assets in securities that make up the S&P 600. (The index itself is cap-weighted; to be included, a company has to have a market cap between $600 million to $2.4 billion.)
All ETFs charge you to be a shareholder. This is called the "expense ratio" and the fees go toward paying the fund's annual operating expenses.
IJR has an expense ratio of 0.06% -- 6 basis points, which is extremely low.
The fund trades about three million shares daily, so it's not as liquid as many other funds.
Five sectors -- Consumer Cyclicals, Healthcare, Financial Services, Technology and Industrials -- make up 73% of the fund.
Firms in the IJR include: Lithia Motors (LAD), Momenta Pharmaceuticals (MNTA) and Emergent BioSolutions (EBS).
In the way of COVID-19 the fund lost 44% of its value as it fell from $85.37 on January 17th to $47.52 on March 23rd (the market bottom).
Since then it has gained 47% and is finding support at its 200-Day Moving Average (the red line) and bumping up against a key Fibonacci level -- $71.16 (blue arrows).
If the ETF gets to the Fibo level above that one -- $77.63 -- we'll have ourselves a nice 10.8% return.
The iShares Russell 2000 ETF (IWM) tracks the performance of the Russell 2000 index. (The RUT is made up of the smallest 2,000 stocks in the Russell 3000.)
The average company in the RUT has a market cap of around $2.5 billion.
This fund is more liquid than IJR -- trading around 20+ million shares daily, and it has an expense ratio of 0.19 (19 basis points), which means it's a more expensive ETF than IJR.
Fully 50% of the fund is made up of three sectors -- Healthcare, Industrials and Technology. Healthcare alone comprises almost a quarter of IWM's holdings (21%).
IWM shared IJR's fate as the bottom fell out of the market earlier this year.
It went from $169.07 on January 17th to $95.91 on March 23rd -- a decline of -43%.
Since then it's gained +52%.
Also, its 50-Day Moving Average (blue line) is getting very close to its 200-Day MA (red line). If the 50-Day passes the 200-Day we'll see the celebrated "golden cross". A very bullish sign.
The ETF's price just broke above a key Fibonacci level at $141.54 and has its sights on the next level at $154.26. That's only 5.6% above its current price, but from there it could approach $170.47 Fibo level.
That will give us a return of almost 17%. Not too shabby!
Thank you as always for your time and attention.
I will see you next week,
Editor-in-Chief, True Market Insiders
P.S.: If you've been stopping by these parts for a while... you know that earlier this year I began training to run the New York City Marathon this coming November. Sadly, like so many other events in 2020, the Marathon has been cancelled.
Blame the coronavirus.
This is particularly a bitter blow for many runners, as 2020 was to mark the 50th Anniversary of this iconic race.
If over the past few months you've written in with advice or encouragement... thank you! I read every letter or email, so I please know I hear you, and I am very grateful for all of your tips and suggestions. (I had no idea so many True Market Insider readers were runners!)
As far as training goes (or doesn't go)... Four times each week I meet on Zoom with my personal trainer, Freddie. Right before the coronavirus struck, Freddie moved away from my area, and I thought I had lost access to his genius.
He's still out of area, but now thanks to the internet, he's back as my trainer! We've been focusing on mobility, strength and cardio training. We use body weight manipulation, dumbbells and a bewildering variety of resistance bands to expand my range of motion and endurance.
I'll keep you posted.