#229: Beating the market with an ETF
In this email:
What are IWM and SPY?
Why the recent rally in IWM?
How do IWM and SPY compare in the long run?
SPY vs IWM
Over the past month, SPY (yellow) has remained flat while IWM (blue) has risen by 12%. So, what exactly are SPY and IWM?
SPY: SPY is an exchange-traded fund (ETF) that tracks the performance of the S&P 500 index (aka “the market”), representing large-cap US stocks.
IWM: IWM is an ETF that tracks the Russell 2000 index, representing small-cap US stocks.
The two indices have zero overlap in stock holdings, per ETF Research Center.
Why did IWM rally recently?
The S&P 500 / SPY is nearly 30% comprised of the Magnificent 7 — Alphabet, Amazon, Apple, Meta, Microsoft, Nvdia, Tesla.
The “Mag 7” lost steam over recent weeks, especially after weak earnings from Tesla and Alphabet, perhaps worrying investors that this AI boom is not translating to earnings results as expected.
This coincided with money flowing into small caps.
Lower inflation data increased the likelihood of interest rate cuts, which is particularly beneficial for small-cap companies that rely more heavily on borrowing.
CPI (June) declined 0.1% from May, the first dip in monthly inflation rate in 4+ years.
The market is now pricing in a 90% chance of a rate cut by September, as of writing.
Looking at post-GFC
Using proprietary data analysis, we looked at the last 15 years after the great financial crisis. At the end of the day, SPY does outperform IWM on an annual basis more often than not.
In any given 1-year period, IWM outperformed SPY 39.4% of the time.
In any given 5-year period, IWM outperformed SPY only 13.9% of the time.
💡 Ape of Omaha’s Takeaway:
Now, with the data in mind, it is not essential to drop SPY from one's portfolio, as it has consistently outperformed IWM in the long run.
However, given the imminent financial easing cycle (or so the market believes as of now), it could be worth adding IWM exposure to one's portfolio to capture potential outperformance.
TOGETHER WITH: SpeakBits (Sponsored)
“SpeakBits is a social platform designed to amplify your voice, spark engaging conversations, and foster a vibrant community where every user's opinion truly matters.”
✨ Speak your mind, connect with the world!
