Small-Cap ETFs Just Became The Hot New Trade—Thanks To Powell

Small-cap stocks, which had been underperforming for months, are now gaining investor interest, with the iShares Russell 2000 ETF (NYSE:IWM) drawing $1.5 billion in new inflows last week, according to FactSet data cited by Etf.com. The rally followed the Fed Chairman Jerome Powell’s speech at Jackson Hole, which indicated that the Federal Reserve might cut interest rates in September, reviving hopes among traders for a more accommodative monetary scenario.

• IWM ETF is up more than 6% in the past month. Check it’s prices live, here.

IWM also surged almost 4% on Aug. 22, one of its best single-day performances for the year. Small-cap ETFs such as IWM are most sensitive to interest rates because declining borrowing costs can enhance growth potential for smaller businesses that depend more on financing.

The recent inflows indicate that investors are betting on a soft-landing scenario in which economic growth continues without further Fed tightening.

This action is notable in the face of ongoing flows into defensive assets. While blue-chip ETFs and safe-haven assets remain in the forefront, the resurgence in small-cap ETFs is a signal of a tactical move into higher-risk, potentially higher-reward areas of the marketplace.

If the optimism persists, other small-cap ETFs could be in line for new inflows next. The Vanguard Small-Cap ETF (NYSE:VB) provides diversified, low-cost access to over 1,400 U.S. small-cap stocks, an attractive choice for investors seeking alternatives to IWM.

The iShares Core S&P Small-Cap ETF (NYSE:IJR) follows the S&P SmallCap 600, with an added quality screen that may be attractive to investors looking for more fundamentally sound companies.

For factor taste, the Avantis U.S. Small-Cap Value ETF (NYSE:AVUV) tilts toward profitability and value. In a rotation risk-on environment, especially if markets expect rate cuts to disproportionately benefit cyclicals and lower-priced stocks, AVUV may attract the attention of factor investors seeking alpha within small caps.

Moreover. the Invesco S&P SmallCap 600 Pure Value ETF (NYSE:RZV) is a pure play in value in the small-cap space, this fund is a higher-beta, higher-volatility choice. If the rally turns into a more general value rotation, RZV may experience tactical flows from traders chasing momentum.

As an indicator for ETF investors, IWM’s inflows may be a helpful metric. If the small-cap rally extends, these funds would enjoy more demand, providing chances for those looking to diversify away from the market’s mega-cap heavyweights.

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