This content is from: Innovation

Now Might Be the Time for Small Caps

They’ve had a rough ride, but their value prop, especially through ETFs, may be hard to ignore.

With central banks globally, including the Fed, leaning toward a dovish policy of easing interest rates, it may be time for investors to take a refreshed look at U.S. small cap equities. After a strong start to the year, U.S. small caps have been a bit battered by trade war storms, which have demonstrated that small caps are not less vulnerable to such unrest than large caps. The result has been a decline in small-cap valuations that might appeal to long-term investors given that smaller companies sometimes obtain benefits from easing and lower interest rates.

For investors currently looking for value in small caps, liquidity and risk management (an ongoing priority, according to 75% of CIOs1) are imperative – and increasingly, they are pursuing those attributes through cost-efficient ETFs. According to a recent Greenwich Associates report, asset owner allocations to ETFs increased to 25% of total assets in 2018, a jump of 6% from one year earlier. In the report, 81% of investors cite liquidity as a primary reason they use ETFs1

Diversification while tracking a popular benchmark

Another strength of ETFs is the market access they provide, according to 79% of institutional investors. In small caps in particular this is highly valued, as resources to conduct research on individual small companies can be limited. However, with an ETF such as the iShares Russell 2000 ETF (IWM), investors gain exposure to 2,000 small caps with more than $1.4 trillion in AUM benchmarked to the Russell 2000 Index.2 This broad coverage may reduce the need for a dedicated research team, and allows investors to diversify their U.S. stock portfolio as they seek long-term growth. Such diversification is one aspect of risk management in a portfolio, and IWM can provide this diversification in an inexpensive and transparent way of shifting allocations.

In addition, IWM, which has more than $40 billion in net assets, has provided deep liquidity for U.S. small cap exposure. The fund has consistently ranked in the top five for liquidity among all U.S.-listed ETFs on a daily basis.3 The low cost – particularly in large size trades where IWM is much more cost efficient than trading countless small cap stocks – flexibility, potential liquidity, and transparency of an ETF like IWM, demonstrate why, among the 40% of institutional investors who have replaced other investment vehicles with ETFs,  45% have used ETFs to replace index mutual funds.

Learn more about a cost effective and liquid way of tapping into the potential of small caps.

1 Greenwich Associates 2018 U.S. Exchange-Traded Funds Study. Based on interviews with 181 institutional investors including investment managers, institutional funds, insurance companies, RIAs and other types of institutional investors, between 10/2018 and 12/2018. BlackRock sponsored the study and is not affiliated with Greenwich Associates.

2 FTSE Russell, 12/31/2018



Carefully consider the iShares Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting or Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss of principal. Small-capitalization companies may be less stable and more susceptible to adverse developments, and their securities may be more volatile and less liquid than larger capitalization companies.

Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage account.  Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Buying and selling shares of ETFs will result in brokerage commissions.

The information included in this material has been taken from trade and other sources considered to be reliable. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our analysis at this date and are subject to change.  The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, but are not guaranteed as to accuracy.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Russell,  nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with Russell or Institutional Investor.

©2019 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.


Related Content