As we delve deeper into the world of stock market investing, a standout trend that is continually grabbing attention is the recent performance of small-cap stocks. These relatively miniature entities are showing significant growth potential, with many market analysts predicting a meteoric rise. One such example is the iShares Russell 2000 ETF (IWM), an Exchange Traded Fund (ETF) that tracks the performance of 2000 small capitalization stocks within the larger Russell 3000 Index. With rising optimism and a shift in investor sentiment, is it time to bet on small caps like IWM?
What differentiates IWM from other stocks or ETFs is its focus on small-cap stocks. Small caps are firms with a market capitalization (valuation) between $300 million to $2 billion. Being smaller in size on the trading floors, these companies often fall under the radar of mainstream investors. But their low valuation, coupled with growth potential, makes them an enticing prospect for investors who can stomach some risk for potentially high returns.
Several factors are fueling the predicted surge in small caps. Firstly, the global economy is transitioning towards revival following the Covid-19 slump. The reopening of businesses and industries, coupled with governmental stimulus packages, are predicted to boost economic health. Small cap stocks, specifically the ones found in IWM, tend to fare better during periods of economic growth due to their nimble nature, ability to pivot quickly, and often domestic-focused business models.
Secondly, changes in market conditions are also predisposing towards small-cap rallies. Lowered interest rates across the globe mean cheap borrowing costs, providing small caps with the much needed financial leverage. Moreover, the undervalued status of most small caps sets the stage for potential price correction and subsequent growth.
As far as IWM is concerned, it has consistently demonstrated solid performance over the past few months. By investing in IWM, you effectively diversify in smaller cap stocks without purchasing each one separately. This gives you exposure to this segment of the market, while mitigating some of the risks associated with investing in a single small-cap stock.
Investing in small-cap ETFs like IWM not only offers investors a diversified portfolio but also lowers the investment risk through its spread among various sectors. Though IWM’s past performance does not guarantee future results, its steady upward trend is promising. With over $50 billion in assets under management and a robust return percentage, IWM is well-placed to build on its encouraging performance.
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