We’re in a stock picker’s market, and that has spurred one corner of the market higher.
Small caps have staged one heck of a rally in 2020 and are having a very strong month as positive vaccine news and better-than-expected economic news outweighs rising coronavirus cases across the U.S.
The IWM iShares Russell 2000 ETF is up more than 99% since the market bottom back on March 23, with the ETF gaining nearly 11% over just the last month alone.
“We now have two-thirds of the Russell 2000 trading 10% or more above their 200-day moving average,” said Jefferies equity strategist Steven DeSanctis. “The last time we saw that was September 2009. Here, we had the big downturn like we did in ’08/’09. We had January, February, March, and now we’re exploding to the upside.”
Will McGough, chief investment officer at Stadion Money Management, added, “It’s probably time to think about small caps in your asset allocation.”
McGough argues that following years of underperformance, the “tide is turning” for small caps thanks in part to therapeutic companies—including IWM holdings Mirati Therapeutics (NASDAQ: MRTX), Ultragenyx Pharmaceuticals (NASDAQ: RARE), and Novavax (NASDAQ: NVAX)—driving gains in the health-care heavy group.
“Small cap companies represent the heart of the American economy—Main Street, so to say—and if you think things are going to get better and have optimism going forward, small caps are your play,” McGough added.
In such an environment, Andrew McOrmond, managing director of ETF trading solutions at WallachBeth Capital, says stock pickers are the group to watch now.
“We’re in the biggest stock picker’s market that I’ve seen in 10 years,” McOrmond said.
Stock pickers tend to invest based on themes, which McOrmond says means “thematic ETFs are going to grow.”
One such thematic ETF that is already on the rise is the JETS U.S. Global Jets ETF, which tracks airline stocks. The JETS ETF has grown from $34 million to $2.7 billion, and its outstanding shares have risen from 2 million to 120 million.
“JETS, for the airlines… reduces the single-stock risk, and airlines have room to grow, right?” McOrmond said. “The original stocks in this move were the techs and the stay-at-home [names]. You’re looking o gain some alpha. Airlines still have a considerable amount to go.”
“Once this vaccine comes out, people are going to travel, and I think Delta (NYSE: DAL), United (NASDAQ: UAL), those major carriers can make up that gap that they’ve experienced and get back to where the other stocks have gone,” McOrmond added. “I think that’s 10-20% for some of these companies, maybe even more.”