The money flowing into small-cap stocks may not come from winning growth trade rotations.
ETF journalist and financial futurist Dave Nadig believes investors are “just buying, buying, buying.”
“What we’re seeing is diversified trade,” he told CNBC.ETF Edge” this week. “We’re seeing money flowing into all areas, and to me that means people are looking to expand their investment horizons, which is a smart thing to do in an election year.
Nadig believes broadening portfolio exposure can help absorb the volatility in the months leading up to the presidential election.
“(Investors) are now buying value stocks for the first time in years, buying some defensive sectors, buying small caps. But they haven’t stopped buying other things, either,” he said. “I think it’s money coming from the huge money markets that we know.”
When it comes to small-cap trading, Nadig believes it’s too early to tell whether their gains are sustainable.
“If small caps continue to rise, I mean, like we had a two or three month period where various small caps clearly beat large caps, then I think you’re going to see a lot of stock money chasing that kind of performance all the time. It happens,” Nadig said.
“If all we see is rediversification, I think you would expect that to be a little bit volatile for the rest of the year,” he added.
this Russell 2000Companies tracking small-cap stocks fell 0.6% on Friday. but it outperforms this Dow Jones Industrial Averagethis S&P 500 Index and Nasdaq Index. In addition, the Russell 2000 Index also posted gains this week – up nearly 2%. The index has gained nearly 8% in the past month. But the numbers have remained essentially flat since President Joe Biden took office in January 2021.
“I don’t doubt that this big wave is coming from cash”
Anna Paglia, who develops global ETF strategy for State Street Global Advisors, sees interest rate cut expectations as a catalyst for strength in lagging sectors.
“Investors have really become accustomed to the risk and will be motivated,” said Paglia, the company’s chief commercial officer.
However, she doesn’t think investors will tap into their money market accounts because people need cash for a reason.
“Most of it is sticky. I don’t doubt that this big wave is coming from cash,” Paglia said. “I don’t think there will be such a large-scale exodus of investors out of money market funds and reallocation into the stock market or into ETFs.”
