‘Just buying, buying, buying’: What the recent small-cap boom suggests about the appetite for risk

The cash movement into small caps might not be a rotation from successful progress trades.

Dave Nadig, ETF journalist and monetary futurist, sees buyers “simply shopping for, shopping for, shopping for.”

“What we’re seeing is a diversification commerce,” he instructed CNBC’s “ETF Edge” this week. “We’re seeing flows into the whole lot, and that to me means individuals need to get a bit bit broader of their publicity which is wise in an election 12 months.”

Nadig contends broadening publicity in portfolios helps soak up volatility within the months main as much as presidential elections.

“[Investors] are actually, for the primary time in ages, shopping for worth, shopping for a few of these defensive sectors, shopping for small caps. However they have not stopped shopping for the opposite issues as effectively,” he mentioned. “I believe that is cash coming in from that enormous bucket of cash markets that we all know is sitting on the market.”

On the subject of the small-cap commerce, Nadig thinks it is too early to find out whether or not the upside is sustainable.

“If now we have a sustained rally in small caps, and by sustained, I imply, like now we have two or three months the place small caps of all varieties are clearly beating the pants off massive caps, then I believe you will see a ton of cash chase that efficiency that at all times occurs,” Nadig mentioned.

“If what we’re seeing as a substitute is only a re-diversification commerce, I believe you’d anticipate this to kind of bobble alongside a bit bit right here for the remainder of the 12 months,” he added.

The Russell 2000, which tracks small caps, fell 0.6% on Friday. Nevertheless it outperformed the Dow Industrial Common, the S&P 500 and the Nasdaq Composite. Plus, the Russell 2000 squeezed out a acquire for the week — up virtually 2%. The index is now up virtually 8% over the previous month. Nevertheless it’s been largely flat since President Joe Biden took workplace in January 2021.

Anna Paglia, who develops world ETF methods for State Avenue International Advisors, sees expectations for rate of interest cuts as a catalyst for power in sector laggards.

“Buyers are actually getting snug with danger, and there will likely be momentum,” mentioned Paglia, the agency’s chief enterprise officer.

Nevertheless, she does not see buyers tapping into their cash market accounts as a result of individuals need money for a purpose.

“Most of it’s sticky. I do not suspect this huge wave popping out of money,” Paglia mentioned. “I do not assume that there will likely be this enormous wave of buyers popping out of cash market funds and reallocating to the inventory market or to ETFs.”