On this week’s episode of ETF Prime, host Nate Geraci sat down with VettaFi Editor-in-Chief Lara Crigger to look at the recent rotation into small-cap stocks. Later, Geraci welcomes Bitwise Asset Management CIO Matt Hougan to discuss the investment case for the newly launched spot ether ETFs.
Small-Cap Stocks Rotate Into Favor
Over the past several weeks, small-cap stocks began their rotation back into favor. Recently, small-caps outperformed large-caps by the largest margin ever over a five-day period.
Not surprisingly, the strong performance was followed by strong flows into small-cap ETFs. The iShares Russell 2000 ETF (IWM) took in $7 billion in net flows in the one-week period trailing July 18.
The small-cap underperformance until recently wasn’t due to poor fundamentals. Rather that was due to valuations having been dwarfed by the exuberance of the mega caps, Crigger said.
“If you didn't have that valuation gap, you probably would have expected to see small-caps do a lot better,” she added.
Crigger attributed the small-cap rally to better-than-expected inflation data. Nearly 100% of market participants are estimating a rate cut in September. In turn, that has encouraged traders to take their cash from money markets or wherever they parked it and start piling into assets that are going to benefit, like small-caps.
How the Trump Trade Relates to Small-Cap Stocks
Some investors think a Trump administration could be beneficial for small-caps. However, there isn’t much evidence to support that.
There is an idea that a second Trump administration would result in lower taxes and would cut regulations and raise tariffs. That, in theory, would benefit U.S. small-cap companies.
Crigger noted that this hasn’t been formally detailed. Additionally, Trump doesn’t seem particularly inclined to surround himself with the kinds of fiscal conservatives who might be enacting that sort of thing on his behalf.
“Right now, any prediction about policies or anything is all guesswork,” she said. “But you still have people who ascribe to the Trump trade, which in practice looks like buying small-cap U.S. stocks.”
Furthermore, during the last Trump administration, large-caps absolutely smoked small-caps, according to Crigger.
Small-Cap ETFs That Are Seeing Attention
As investors add exposure to small-cap ETFs, it’s interesting to see the most popular funds are currently those charging below the category average of 47 basis points.
However, while investors focus on low-cost options, it’s important to not overlook active ETFs. According to Crigger, small-caps are one of the few pockets of the U.S. equity market where active management really can make a difference.
Looking at the top 10 small-cap ETFs by assets, only one is actively managed: The Avantis U.S. Small Cap Value (AVUV). Meanwhile, AVUV is handily outperforming the other nine passive ETFs on that list, according to Crigger.
“You could still see a lot of opportunity for those active managers to provide performance that is substantially better than what you're getting in that passive vehicle,” she noted.
The Introduction of Spot Ether ETFs
Spot ether ETFs launched on Tuesday, marking an important milestone for the industry.
Notably, spot ether ETFs went through a much less grueling approval process than spot bitcoin ETFs. Spot bitcoin ETFs just launched in January, following years of regulatory hurdles.
Hougan, whose firm launched the Bitwise Ethereum ETF (ETHW), said he thinks spot ether ETFs were able to launch more quickly as the SEC realized it was looking at another court battle that would end in a loss. Additionally, politics likely played a role.
There was a change in Washington attitude around crypto, according to Hougan, as Democrats were breaking rank and voting for pro-crypto legislation in Congress. This, in combination with the SEC’s experience with spot bitcoin ETFs, potentially influenced the SEC’s approval of spot ether ETFs.
Do Spot Ether ETFs Trade In Line With Underlying Ether?
Nine new spot ether ETFs launched today, and all promise the same thing: exposure to spot ethereum.
One key difference between funds, which will likely become pronounced in the coming days and months, is how close the price of the fund is trading with the underlying ether.
Hougan said investors can look at indicative NAVs to the extent that those are available. Additionally, investors can look at end-of-day NAVs. Investors can even consider the issuer’s track record with spot bitcoin ETFs, since the two processes are very similar.
“We're really proud ... if you look at our bitcoin ETF, it's been trading very tight to its net asset value -- in large part because of the approach we take to the trading,” he said. He pointed to the firm’s practice of working with multiple market makers to get the best possible price for ethereum.
“That trading acumen is what translates into this tight premium or discount versus the net asset value,” Hougan explained. “There are some ETF issuers who aren’t as crypto native, who only trade with one counterparty, and you can see that in wider premiums and discounts.”
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