Retail Investors Pile Into Small Cap Stocks at Record Pace as Fed Rate-Cut Hopes Rise

Retail investors have poured into small-cap stocks amid hopes that recent economic data could embolden the Federal Reserve to start cutting its benchmark interest rate, according to analysts at Vanda Research. 

Retail investors loaded up on a record $108.8 million of the iShares Russell 2000 ETF (IWM) on Tuesday, according to data from Vanda Research. Individuals were also net buyers of Direxion Daily Small Cap Bull 3x Shares (TNA), a leveraged fund that triples the Russell 2000’s daily return, to the tune of more than $58 million.

After a quiet second quarter for retail traders, activity has picked up this month “in what appears to be a response to improving growth prospects driven by Fed easing hopes and Trump’s pro-growth agenda,” wrote Marco Iachini, Senior VP of Research, and Lucas Mantle, VP of Data Science in a note Wednesday afternoon. 

Investors Scale Back Buying of Tech Stocks

Lower interest rates are seen as beneficial to smaller companies, which generally have higher levels of debt than bigger ones and can be more susceptible to economic stress. 

The rotation into small-cap stocks has coincided with investors modestly scaling back their buying of tech stocks. Though they haven’t by any means written the sector off; single-stock leveraged ETFs, which typically track the largest tech names, saw record inflows after last week’s consumer price inflation data. Trading activity in Tesla (TSLA) stock, a perennial favorite among retail investors, has also rebounded in recent weeks and is currently near its highest level all year. 

Ultimately, Iachini and Mantle conclude, the data suggests the Q2 retail trade slump could be over. With retail investors piling into small caps, embracing leverage, and buying large-cap dips, there’s reason to believe “the recent uptick in overall retail purchases of US financial assets may extend over the coming weeks.”