Here’s why the iShares Russell 2000 (IWM) trails IVV, IYW ETFs

The iShares Russell 2000 ETF (IWM) has been left behind in the ongoing surge. Its total return in 2024 stands at 4.35%, lower than the iShares Core S&P 500 (IVV) and the iShares US Technology (IYW)’s 11.45% and 13%, respectively. 

This trend has continued for many years as demand for small-cap stocks has waned. Its total return stood at 44.8% in the past five years while the other two have jumped by over 101% and 193%, respectively.

IWM vs IVV vs IYW ETFs

Why the Russell 2000 index underperforms

There are several reasons why the Russell 2000 index has underperformed the broader market. First, technology stocks are a smaller component of the ETF. Data shows that its top sectors are industrials, financials, and healthcare. Information technology companies account for 14.85% of the ETF.

The tech sector has done well in the past decades as companies like Apple, Microsoft, Google, Nvidia, and Amazon have thrived. These firms have all had their market caps grow to over $1 trillion in the past few years. 

Second, the Russell 2000 index is struggling because of the elevated interest rates, which stand at the highest point in over two decades. There are two main implications for this. First, these companies are not benefiting from higher interest income because of their weaker balance sheets.

In contrast, many large-cap companies have made easy money by just investing their excess cash in government bonds. Meta Platforms made over $2 billion in interest and investment income only. 

Second, small-cap companies are having to pay substantial sums of money in interest. Data shows that the index’s constituents have over $832 billion in total debt. 75% of this debt must be refinanced in the next five years. In contrast, 50% of the debt in S&P 500 index will need to be refinanced by then.

Small-cap companies' growth rate is slowing

Further, IWM constituent companies are growing at a slower rate than S&P 500 and Nasdaq 100 constituents. Data by FactSet showed that the average revenue growth rate for S&P 500 index companies was 5.2% in Q1. 

In contrast, data by Refinitiv shows that of the 1,287 companies that have published their results, their blended revenue growth was minus 1%. The top-performing companies in the index are in industries like healthcare, real estate, industrials, and utilities.

The other reason is that IWM companies are mostly domestic and are therefore affected by the country’s economic growth. While the US has done better than other countries, there are signs that the economy is slowing. Consumer confidence has tumbled while the manufacturing and services PMIs have moved below 50.

IWM ETF analysis

IWM chart by TradingView

Turning to the weekly chart, we see that the iShares Russell 2000 ETF, has bounced back in the past few weeks. It has jumped from the year-to-date low of $161.15 this year to $210. The stock has moved above the crucial resistance level at $196.62, its highest swing in August 2022, January 2023, and July 2023. 

The ETF has jumped above the 23.6% Fibonacci Retracement while the 100-week and 50-week moving averages have made a bullish crossover. Therefore, the outlook for the ETF is moderately bullish, with the next point to watch being its all-time high of $236.10.