According to S&P Global Inc, S&P 500 companies have 43% of their sales derived from overseas in 2016. On the other hand, Russell 2000, a small cap index, are seen to more domestically oriented. Now, between the 2 indices, which would provide insulation from a trade war?
Many would have voted Russell 2000, because even if the economy slows, people will still need toothbrushes and diapers (consumer staples). It was “evident” that in early March, when Donald Trump announced tariffs on steel and aluminum imports, the small cap Russell 2000 index began to take off vs the S&P 500 as cash shifted to smaller companies.
Now strategies across Wall Street are pointing the “flaws” in the “small companies are safer” thesis – small cap is heavy reliance on imports!
Interestingly, flows into the largest exchange-traded fund tracking small-cap stocks, iShares Russell 2000 ETF, also revealed a change of heart among investors. From March through the end of May, the $47 billion fund saw $4.6 billion in net inflows. Since then, more than 25% of that cash has fled!
Here is the comparison between iShares S&P 500 (IVV) vs iShares Russell 2000 (IWM):
Now with escalating trade war fear, a rising interest rate environment, there is a good chance that S&P 500 would outperform Russell 2000 again.
Bloomberg Business Week, 2018-07-20, “Nobody Knows Where to Take Shelter from Trump’s Trade War“