So far this year, small market capitalization stocks have seen a big rally.
The iShares Russell 2000 ETF (IWM), which tracks the small cap-focused Russell, has rallied more than 11 percent in 2019, capping off Friday with its third up week in a row. By comparison, the S&P 500 ETF (SPY) has advanced 8 percent.
Kevin O’Leary, co-founder of O’Leary Funds and co-host of “Shark Tank,” told CNBC recently that several tailwinds should continue to benefit small caps over large caps this year.
“Tax reforms haven’t had their full effect yet and because the tax code has just been re-written for these all domestic companies. Remember the majority of the sales for the Russell 2000 are all domestic,” O’Leary said on CNBC’s “ETF Edge” on Monday. “The market here still has the benefits of deregulation and tax reform in a way that no other geography has.”
O’Leary said he put his portfolio at a 20 percent weighting to small caps, on the belief they will continue to outperform through the rest of the year.
One factor also benefiting the group is their diversification, added “ETF Edge” host Bob Pisani. While the SPY ETF’s top 10 holdings represent 21 percent weighting, the IWM ETF’s top 10 represent less than 3 percent.
“There are a lot more stocks in the portfolio obviously,” said Dave Nadig, managing director of ETF.com. “Part of the problem with the big indexes we talk about – the S&P 500, the SPY — they tend to actually get polluted, if you will, with a lot of mid-cap names so you have to really look hard to find some purity in your large and small-cap exposure.
He added: “At least with something like the IWM, the iShares small-cap, you’re getting that pure-small cap side of the equation.”