Small Currents, Wider Seas

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The year commenced with a familiar cadence – the broad market, a vessel charting a course well-worn, continued its ascent. The S&P 500, after seasons of gathering strength, added another measure to its climb in January, though not without a tremor, a whisper of potential shifts in the currents of trade. It was a strong beginning, yes, but one that felt…contained. As if the larger narrative was already written.

Yet, beneath the surface, a different story unfolded. A subtle stirring in the smaller tributaries of the market. Two exchange-traded funds, nimble craft navigating the same waters, demonstrably outperformed the larger fleet. And this, I suspect, is not a fleeting phenomenon. It’s a hint of a coming realignment, a shift in the very foundations of market weight. The smaller companies, long overshadowed, may finally be gathering the strength to break free.

The Divergence

While the S&P 500 rose a respectable 1.4% in January, the Invesco S&P 500 Equal Weight ETF ascended a far more significant 3.4%. Even more striking was the performance of the iShares Russell 2000 ETF, leaping ahead with a gain of 5.5%. These are not merely numbers; they are echoes of a changing tide. The market, for so long focused on the leviathans, is beginning to acknowledge the power of the collective smaller currents.

The Equal Weight ETF, in its deliberate distribution of capital, rejects the concentration of power. It is a leveling force, a recognition that value is not solely determined by size. The Russell 2000, tracking the smallest of the publicly traded companies, is a barometer of the broader economic landscape, a measure of the vitality of the countless unseen engines driving growth.

For three years, the larger vessels have dominated, their wakes creating a turbulence that left the smaller boats struggling. The megacap technology stocks, fueled by the promise of artificial intelligence, have become disproportionately influential, accounting for an astonishing 41% of the S&P 500’s value. The index, once a representation of the broader economy, has become a mirror reflecting a narrow segment of its dynamism. This concentration, however, is rarely sustainable. Like a tree growing too quickly, it risks becoming brittle.

The time is approaching when the weight will shift. The smaller companies, unburdened by the expectations and valuations of their larger counterparts, may finally find their footing. And these two ETFs, I believe, offer a compelling way to participate in that potential resurgence.

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The Shifting Winds

Several macroeconomic factors suggest a favorable environment for smaller companies. The tariffs imposed in the previous year, a harsh winter for many businesses, are now beginning to recede. The larger companies, with their negotiating power, may have weathered the storm more easily, but the smaller ones, lacking such leverage, bore the brunt of the impact. As we move beyond this period, their growth prospects should improve.

Furthermore, the possibility of further interest rate cuts by the Federal Reserve could provide a significant boost. Smaller businesses, often reliant on variable-rate loans, would benefit from lower borrowing costs. It is as if a gentle breeze is filling their sails, allowing them to navigate with greater ease.

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A Question of Value

The S&P 500, buoyed by the valuations of a handful of technology giants, has reached a point where its price-to-earnings ratio is becoming stretched. The market, in its enthusiasm for the promise of artificial intelligence, may be overlooking the underlying fundamentals. It is a beautiful, shimmering surface, but one that may be masking deeper currents.

The S&P 500 Equal Weight ETF, with its more balanced approach, trades at a considerably more attractive valuation. It is a recognition that value is not solely determined by growth potential, but also by price. The Russell 2000, while also exhibiting a higher valuation, includes a number of companies with limited or negative earnings. A more comparable benchmark, the S&P 600, which focuses on small-cap companies with positive earnings, trades at an even more compelling level.

For investors concerned about the quality of the companies included in the iShares Russell 2000 ETF, the Avantis U.S. Small Cap Value ETF offers an alternative. This fund employs a more rigorous screening process, focusing on companies with strong fundamentals and sustainable earnings. Its January performance, exceeding that of the Russell 2000 ETF, is a testament to the power of value investing.

The discrepancy in valuations is striking. It suggests that there is ample room for a rotation into smaller companies. After years of underperformance, a mean reversion is increasingly likely. The last time the S&P 500 outperformed the equal-weight index by this much, the latter embarked on an extraordinary run. The currents are shifting, and those who are prepared may be rewarded.

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2026-02-09 17:03