The flow of money into small caps may not be a rotation of winning growth trades.
Dave Nadig, ETF journalist and financial futurist, sees investors “just buying, buying, buying.”
“What we’re seeing is a diversification trade,” he told CNBC’s “ETF Edge” this week. “We’re seeing flows in everything, and to me that means people want to get a little bit broader in their exposure, which is smart in an election year.”
Nadig argues that increasing portfolio exposure helps absorb volatility in the months leading up to the presidential election.
“[Investors] are now buying value for the first time in a while, buying some of these defensive sectors, buying small caps. But they haven’t stopped buying other things either,” he said. “I think this is money coming in from that giant bucket of money markets that we know is out there.”
When it comes to small-cap trading, Nadig thinks it’s too early to determine whether the uptrend is sustainable.
“If we have a sustained rally in small caps, and by sustained, I mean, like we have two or three months where small caps of all types are clearly beating the pants off of large caps, then I think you’re going to have a lot of money chasing that feat that always happens,” Nadig said.
“If what we see instead is just a rediversification trade, I think you would expect this to continue here a little bit for the rest of the year,” he added.
The Russell 2000, which tracks small caps, fell 0.6% on Friday. But it performed better than the Dow Industrial averagethe S&P500 and the Nasdaq Composite. Additionally, the Russell 2000 posted a gain this week – up almost 2%. The index is now up almost 8% in the past month. But since President Joe Biden took office in January 2021, the situation has been largely flat.
‘I don’t suspect this big wave is coming from cash’
Anna Paglia, who develops global ETF strategies for State Street Global Advisors, sees expectations for rate cuts as a catalyst for strength among sector laggards.
“Investors are really starting to get comfortable with risk, and momentum will build,” said Paglia, the company’s chief business officer.
However, she doesn’t see investors tapping their money market accounts because people want cash for a reason.
“Most of it is sticky. I don’t suspect this big wave is coming from cash,” Paglia said. “I don’t think there will be a huge wave of investors moving out of money market funds and into the stock market or into ETFs.”