Small-cap stocks posted a blistering performance in the first half of this year. The Russell 2000 Index surged 22% through June, marking its strongest first-half performance since 1991. It also beat the NASDAQ by 9%, its biggest first-half outperformance since 2001, according to the WSJ.
Small caps are generally more domestically focused, so they benefited from a resilient economy, rising earnings, supportive trade policies, infrastructure spending, and reshoring initiatives. Enthusiasm around AI beneficiaries within the small-cap universe also helped lift the indexes.
The top-performing companies within the small-cap indexes came from the AI, semiconductor, space, nuclear energy, quantum computing, and biotech sectors.
Highflying Stocks Exit Russell Index After Rebalance
The Russell indexes rebalanced at the end of June. According to Bespoke, each of the 25 best-performing Russell 2000 constituents before the rebalance had gained at least 250% over the past year, and all have now moved into the Russell 1000.
Bloom Energy BE is getting promoted to the Top 200 Index after surging more than 1100% over the past year. For the first time since 2008, a stock has gone straight from the small cap index to the mega cap index, per WSJ. Read: Bull of the Day: Bloom Energy (BE)
TeraWulf WULF, Credo Technology Group CRDO and Sterling Infrastructure STRL are among other highflying stocks that left the index thanks to blockbuster gains.
Looking ahead, if the Fed raises interest rates because inflation remains elevated, that could pose headwinds for smaller companies. Small-cap companies often carry heavier debt burdens, frequently with floating interest rates, making them more sensitive to higher borrowing costs. They also tend to have less access to the bond market.
A Tale of Two Small-Cap Indexes
Since its inception in May 2000, the iShares Core S&P Small-Cap 600 IJR has returned more than 1,170%, compared with about 812% for the iShares Russell 2000 ETF (IWM.
According to a study by S&P Dow Jones Indices, most of that performance gap stems from the S&P SmallCap 600's built-in profitability requirement.
Over the past year, however, the Russell 2000 has outperformed the S&P SmallCap 600 because many companies tied to quantum computing, nuclear energy, and AI are not yet profitable and therefore are excluded from the S&P SmallCap 600.
To learn more about IWM, IJR and the Invesco S&P SmallCap Momentum ETF XSMO, please watch the short video above.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
