IWM ETF: How high can the Russell 2000 index fund go?

The iShares Russell 2000 ETF (IWM) stock price has done well amid signs of animal spirits in the financial market. The index, which tracks many small-cap companies in the United States, soared to a high of $225, its highest point since November 2021. 

The IWM ETF has jumped by more than 42% from its lowest point in 2023, beating other popular funds like the SPDR S&p 500 (SPY) and the Invesco QQQ (QQQ) ETFs. 

Federal Reserve rate cuts

The IWM ETF has gone parabolic in the past few days after the US published encouraging consumer inflation data. Data by the Bureau of Labor Statistics (BLS) showed that the headline consumer price index (CPI) slowed to 3.0% in June while the core CPI moved to 3.2%.

The core CPI’s performance has been notable since it moved from almost 5% earlier this year to the current 3.2%. Therefore, there is a likelihood that the trend will continue falling in the coming months.

The Fed has now signaled that it will start cutting interest rates in the coming months. In a statement, this week, Jerome Powell noted that the Fed would start cutting rates even before inflation slows to its target of 2.0%. 

Therefore, the CME Fed Rate Monitor Tool, 91% of all analysts believe that the Federal Reserve will start cutting rates in September. As shown below, the hope is that it will drop its range to between 5.00% and 5.25%.

Fed rate monitor tool

American stocks do well when the Fed signals that it will start cutting interest rates. One of the reasons for this is that such cuts will lead to a rotation from value stocks to growth or risky ones. It will also lead to a rotation from money market funds - which have over $6.1 trillion in assets - to stocks. In a recent note to Bloomberg, an analyst said:

Small-cap stocks and interest rates

The other reason why the iShares Russell 2000 ETF has rebounded is that small-cap stocks have been hit hard by higher interest rates. As I have written before, most of these companies tend to have smaller balance sheets and generate less profits. 

This is unlike many large companies that have billions of dollars in cash on their balance sheets. For example, big companies like Berkshire Hathaway, Apple, Microsoft, and Meta Platforms have made substantial sums of money by just packing their funds in risk-free assets.

Many small-cap companies rely on expensive financing, unlike large companies that attract huge demand for their bonds. 

Most importantly, the IWM ETF is one of the cheapest big funds in the market. It has a price-to-earnings ratio of 15.17, much lower than ETFs that track the S&P 500 and Nasdaq 100 indices. The S&P 500 index has a multiple of over 20. 

Further, the Russell 2000 index is cheering the ongoing corporate earnings. Most companies like Johnson & Johnson, JPMorgan, and Goldman Sachs have reported strong earnings, signaling that corporate America is back.

Top Russell 2000 stocks

Most companies in the IWM ETF have risen this year, with the top ones being in the biotech and health industry. The best-performing companies in the fund are Genedx Holdings, Corbus Pharmaceuticals, Longboard Pharmaceuticals, and Elevation Oncology.

Outside of this category, other top companies in the fund are Root, Dave, Nuscale Power, Real Brokerage, and Core Scientific. Root, a leading insurance company, has done well in the past few months because of its strong growth.

Dave, a leading mobile application, has risen sharply as the number of users in the platform rose to over 10 million. Core Scientific has soared because of the ongoing Bitcoin bull run. The rally accelerated after Coreweave made a bid for the company.

IWM ETF stock analysis

IWM chart by TradingView

The iShares Russell 2000 index has done well in the past few months. It recently bounced above the key resistance point at $196.47, its highest swing in August 2022 and January and June 2023. 

The ETF has also risen above the first resistance of the Woodie pivot point and is approaching the first resistance point of the Andrew’s pitchfork tool. 

Meanwhile, the fund has jumped above the 50-week and 100-week Exponential Moving Averages (EMA). At the same time, the Relative Strength Index (RSI) and the MACD have continued rising. 

Therefore, the fund will likely continue rising as buyers target the key resistance point at $235, its highest point in 2021 and the second resistance of the Woodie pivot point. A move above that level will see it jump to the next psychological level at $250.