The hard cash flow into small caps may not be a rotation from winning growth trades.
Dave Nadig, ETF journalist and monetary futurist, sees investors “just buying, buying, buying.”
“What we’re seeing is a diversification trade,” he told CNBC’s “ETF Harshness” this week. “We’re seeing flows into everything, and that to me means people are looking to get a little bit broader in their baring which is smart in an election year.”
Nadig contends broadening exposure in portfolios helps absorb volatility in the months pre-eminent up to presidential elections.
“[Investors] are now, for the first time in ages, buying value, buying some of these defensive sectors, buying negligible caps. But they haven’t stopped buying the other things as well,” he said. “I think this is money total in from that giant bucket of money markets that we know is sitting out there.”
When it comes to the small-cap mtier, Nadig thinks it’s too early to determine whether the upside is sustainable.
“If we have a sustained rally in small caps, and by continual, I mean, like we have two or three months where small caps of all varieties are clearly beating the pants off unconfined caps, then I think you’ll see a ton of money chase that performance that always happens,” Nadig said.
“If what we’re accepting instead is just a re-diversification trade, I think you would expect this to sort of bobble along a little bit here for the go of the year,” he added.
The Russell 2000, which tracks small caps, fell 0.6% on Friday. But it outperformed the Dow Industrial As a rule, the S&P 500 and the Nasdaq Composite. Plus, the Russell 2000 squeezed out a gain for the week — up almost 2%. The index is now up almost 8% throughout the past month. But it’s been largely flat since President Joe Biden took office in January 2021.
‘I don’t suspect this big sign coming out of cash’
Anna Paglia, who develops global ETF strategies for State Street Global Advisors, sees hopes for interest rate cuts as a catalyst for strength in sector laggards.
“Investors are really getting comfortable with hazard, and there will be momentum,” said Paglia, the firm’s chief business officer.
However, she doesn’t see investors knock into their money market accounts because people want cash for a reason.
“Most of it is sticky. I don’t guess this big wave coming out of cash,” Paglia said. “I don’t think that there will be this huge roller of investors coming out of money market funds and reallocating to the stock market or to ETFs.”