I have been focusing on the theme of group rotation in my recent Real Money columns, and the market's performance in June confirms my theory that institutional investors are rotating out of mega-cap tech names. I believe this portfolio rebalancing will continue through the summer.
I use FTSE Russell's Monthly Index Series Review to evaluate market performance by capitalization bucket. The final June figures are striking and quite informative.
June was a good month to be long stocks, clearly, as each of Russell's 10 main component sub-indices posted gains for the month. In contrast to the performance of earlier months of 2017, smaller-cap stocks outperformed materially in June.
In fact, Russell's worst-performing subcomponent in June was its Top 50 Mega Cap Index, which posted a barely visible 0.16% gain for the month. The components of this index are probably easily guessed -- Apple (AAPL) , Microsoft (MSFT) , Trifecta Stocks holding Amazon (AMZN) , Johnson & Johnson (JNJ) and Facebook (FB) are the five largest members of the Index -- and the mega-caps did perform very well in the first half of 2017, posting a 9.31% total return through June 30.
As I have mentioned so many times in my RM columns, though, it is the second derivative that is the most important factor in investment analysis. So, while mega-caps ruled in the first half, June's performance tells us that they are unlikely to do so in the second half. Indeed, the best performer among Russell's sub-indices in June was composed of its smallest members: the Russell Microcap Index (RUMIC).
RUMIC has been a major laggard in the euphoria of the Trump Jump, posting only a slight decline from year-end through the end of May while its large-cap brethren roared ahead. That all changed in June, though, as the RUMIC rose 5.19% during the month, reversing its earlier declines and bringing the year-to-date performance to a respectable gain of 4.23%.
As a micro-cap investor myself, I can attest to the influence of bank stocks on smaller stock performance metrics. In fact, as of the most recent data, financials represented 24.91% of the value of the iShares Micro-Cap ETF (IWC) , which is designed to track the performance of the Russell Microcap Index.
So, as the Fed raises short-term rates and bank stocks come back into favor among institutional investors, RUMIC will necessarily benefit. It's been a good trade in the past month, and I believe the market is set up for a shift toward "the little guys" in the second half.
Therefore, it's worth your while to seek out some of these smaller stocks yourself, or at the very least, buy a fund linked to the performance of smaller stocks, like the Russell Microcap or even the Russell 2000, which is really more of a mid-cap index.
The market is telling us that the easy money in large-cap names like Amazon and Facebook has already been made, but, as my greying temples would indicate, smaller stocks are always extremely volatile based on event-driven situations.
The beta of IWC -- the microcap-tracking ETF -- is a whopping 1.56. That volatility can work in your favor, though, especially if professional fund managers have had enough of FANG-mania.
I'll discuss individual micro-cap names of interest in a future column.