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Bigger Could be Better Again For Small-Caps in 2020

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Small-cap stocks and the related ETFs have recently shown signs of life and some are on the cusps of significant technical breakouts. Still, it’s likely that large-cap benchmarks will again best their small-cap rivals this year.

For investors willing to bet that trend will continue in the new year, the Direxion Russell Large Over Small-Cap ETF (NYSEArca: RWLS) is an ETF to consider. RWLS offers the ability to benefit not only from large-cap equities potentially performing well but from their out-performance compared to their small-cap brethren.

The diverging fortune between the small-cap and large-cap segment is a cause for concern for some investors. Small-cap stocks, which focus more of on the domestic economy, typically strengthen ahead of a wider market rally and fall more quickly ahead of a broader pullback.

RWLS tracks the Russell 1000®/Russell 2000® 150/50 Net Spread Index, which “measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Index (the “Long Component”) and 50% short exposure to the Russell 2000® Index (the “Short Component”),” according to Direxion.

Favorable Environment

In 2019, plenty of themes made large caps more attractive than small caps and some of those trends could appear again next year.

“This year has seen some very pronounced size and style performance trends as investors have favored large caps over small caps and growth over value,” said FTSE Russell Managing Director Alec Young in a recent note. “Large caps and growth stocks have benefited from macro tailwinds including fears of slowing global growth and endless US-China trade uncertainty, both of which have pushed investors towards higher quality blue chips with more dependable growth than their more economically sensitive, small cap, value counterparts.”

Still, it can be hard to ignore the recent resurgence of small caps, a theme investors can play with the Direxion Russell Small Over Large Cap ETF (NYSEArca: RWSL).

Related: Defensive Plays May Be Better Going Forward, Says Morgan Stanley 

RWSL is an avenue to not only see small cap stocks perform well, but a way to capitalize on their outperformance versus their large cap brethren.

“Not surprisingly, small caps have begun to recently outperform while value has been far more competitive,” said FTSE’s Young. “If a US-China phase 1 trade deal proves forthcoming and a re-escalation in tensions can be avoided, it’s likely optimism on global growth will improve, helping more economically sensitive assets like value and small caps do better.”

For more relative market trends, visit our Relative Value Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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