ETFs capturing small-cap equities have been boosted in recent weeks following June’s US CPI report detailing a smaller-than-expected rise in core consumer prices.
Core CPI rose 3.3% from one year ago – below forecasts of 3.4% – and the smallest rise since April 2021.
The news sparked a rally for small-cap equities, cementing predictions for the Federal Reserve to start lowering interest rates this year.
The CPI report has meant that small cap ETFs have extended the lead over large-cap exposures, with R2US rising 7.5% over the last month versus 1% for the SPDR S&P 500 UCITS ETF (SPY5).
Investors have been quick to capitalise. The Xtrackers Russell 2000 UCITS ETF (XRSU) raked in $137m inflows over the past month.
Following suit was the iShares MSCI USA Small Cap ESG enhanced UCITS ETF (CUSS) pulling in $131m, while the SPDR Russell 2000 U.S. Small Cap UCITS ETF (R2US) gathered $105.9m.
Large cap ETFs have dominated in H1 2024 with the likes of Nvidia continuing to boom on the back of strong Q4 earnings, yet the stellar performance of small cap ETFs in the final quarter of 2023 is beginning to re-emerge.
Alongside Fed rate cut expectations boosting small caps, broadening markets coupled with earnings growth are also set to propel small cap ETFs for the remainder of 2024.
Small cap ETFs were hotly tipped to outperform their large cap peers at the start of the year, after Bank of America noted 2024 could be the first-time small beats large in almost a decade.
Alongside interest rate cuts, Carey Hill, head of US small and mid-cap strategy at the Bank of America (BofA), noted the improving breadth of the US equity market and cheap valuations as key factors.
