'Just buying, buying, buying’: What the recent small-cap boom suggests about the appetite for risk

The wealth travel into tiny caps whitethorn not beryllium a rotation from winning maturation trades.

Dave Nadig, ETF writer and fiscal futurist, sees investors "just buying, buying, buying."

"What we're seeing is simply a diversification trade," helium told CNBC's "ETF Edge" this week. "We're seeing flows into everything, and that to maine means radical are looking to get a small spot broader successful their vulnerability which is astute successful an predetermination year."

Nadig contends broadening vulnerability successful portfolios helps sorb volatility successful the months starring up to statesmanlike elections.

"[Investors] are now, for the archetypal clip successful ages, buying value, buying immoderate of these antiaircraft sectors, buying tiny caps. But they haven't stopped buying the different things arsenic well," helium said. "I deliberation this is wealth coming successful from that elephantine bucket of wealth markets that we cognize is sitting retired there."

When it comes to the small-cap trade, Nadig thinks it's excessively aboriginal to find whether the upside is sustainable.

"If we person a sustained rally successful tiny caps, and by sustained, I mean, similar we person 2 oregon 3 months wherever tiny caps of each varieties are intelligibly beating the pants disconnected ample caps, past I deliberation you'll spot a ton of wealth pursuit that show that ever happens," Nadig said.

"If what we're seeing alternatively is conscionable a re-diversification trade, I deliberation you would expect this to benignant of bobble on a small spot present for the remainder of the year," helium added.

The Russell 2000, which tracks tiny caps, fell 0.6% connected Friday. But it outperformed the Dow Industrial Average, the S&P 500 and the Nasdaq Composite. Plus, the Russell 2000 squeezed retired a summation for the week — up astir 2%. The scale is present up astir 8% implicit the past month. But it's been mostly level since President Joe Biden took bureau successful January 2021.

Anna Paglia, who develops planetary ETF strategies for State Street Global Advisors, sees expectations for involvement complaint cuts arsenic a catalyst for spot successful assemblage laggards.

"Investors are truly getting comfy with risk, and determination volition beryllium momentum," said Paglia, the firm's main concern officer.

However, she doesn't spot investors tapping into their wealth marketplace accounts due to the fact that radical privation currency for a reason.

"Most of it is sticky. I don't fishy this large question coming retired of cash," Paglia said. "I don't deliberation that determination volition beryllium this immense question of investors coming retired of wealth marketplace funds and reallocating to the banal marketplace oregon to ETFs."