IWM is the dominant ETF for US small-cap equity exposure, tracking the Russell 2000 index of approximately 2,000 smaller US companies. Small-caps behave differently from large-caps in important ways: they are more domestically oriented since smaller companies typically earn most of their revenue in the US, making them less exposed to currency headwinds or global economic slowdowns but also more sensitive to US domestic economic conditions. They carry more leverage and are more dependent on bank lending, making them more sensitive to interest rate changes and credit conditions than large-caps. Small-caps tend to outperform large-caps during the early and mid-stages of economic recovery when credit is loosening, risk appetite is rising and domestic growth is accelerating. They underperform when rates rise sharply, credit tightens or investors prefer quality — which is why IWM has significantly trailed large-cap indexes over much of the past decade. Profitability characteristics are lower in the Russell 2000 than in large-cap indexes. For investors, IWM is the standard vehicle for expressing a US domestic growth view, cyclical recovery trade or a value tilt, and it benefits from the long-term historical tendency of small-caps to outperform over very long periods if held through full cycles.
