Money flowing into small-cap companies may not be a turnover of profitable growth deals.
Investors are just “buying, buying, buying,” says Dave Nadig, an ETF journalist and financial futurist.
“What we’re seeing is a diversification trade,” he said in an interview on CNBC’s “ETF Edge” this week. “We’re seeing flows into everything, and that to me means people are looking to broaden their exposure a little bit, which is smart in an election year.”
Nadig stresses that expanding exposure in investment portfolios helps absorb volatility in the months leading up to the presidential election.
“Investors are now, for the first time in a long time, buying value, buying some of these defensive sectors, buying small-cap stocks. But they haven't stopped buying other things either. I think this is money flowing out of that giant bucket of money markets that we know is out there,” he said.
When it comes to trading small-cap stocks, Nadig believes it's too early to tell if the uptrend is sustainable.
“If we have a sustained rally in small caps, and by sustained I mean like we have two or three months where small caps of all types clearly outperform large caps, I think you’ll see a ton of money chasing that performance that always happens,” Nadig said.
“If what we're seeing instead is just a re-diversification trade, I think you would expect this to settle down a little bit here for the rest of the year,” he added.
the Russell 2000The Dow Jones Industrial Average, which tracks small-cap companies, fell 0.6% on Friday. But it outperformed the Dow Jones Industrial Average. Dow Industrial Averagethe Standard & Poor's 500 And the Nasdaq CompositeAdditionally, the Russell 2000 gained for the week — up about 2%. The index is now up about 8% over the past month. But it has been largely flat since President Joe Biden took office in January 2021.
“I don't think this big wave of criticism is coming.”
Anna Paglia, who develops global ETF strategies for State Street Global Advisors, sees expectations of lower interest rates as a source of strength for the sector’s laggards.
“Investors are getting really comfortable with risk, and there will be momentum,” said Paglia, the company’s chief business officer.
However, she does not see investors exploiting their money market accounts because people want cash for some reason.
“Most of it is sticky,” Paglia said. “I don’t expect this big wave of criticism to come. I don’t think there’s going to be a huge wave of investors getting out of money market funds and reallocating their money to the stock market or ETFs.”
