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The iShares Russell 2000 Index (IWM) has suffered a big reversal after surging to a record high earlier this year. The fund, which tracks the top small cap companies in the US, retreated to a low of $200, down by almost 20% from its all-time high. This article explains why the Russell 2000 index has crashed, and some of its biggest movers this year.
Donald Trump Liberation Day tariffs
The Russell 2000 index is a popular fund focusing on the United States’ small companies. Most of these companies are domestic ones without a big presence abroad.
According to Blackrock, most companies in the fund are in the financials industry, which includes banks and insurance firms. The other big names in the fund are in the industrials, healthcare, technology, and consumer discretionary. It also has companies in the real estate and energy industries.
The biggest companies in the Russell 2000 index are the likes of Sprouts Farmers Market, Insmed, FTAI Aviation, Corcept Therapeutics, and Southstate Corporation.
The main reason why the IWM ETF has suffered a harsh reversal this year is the fear of the ongoing trade war between the US and its top trading partners.
Donald Trump has implemented tariffs on Canada and Mexico, two US trading partners. He has also implemented tariffs on imported vehicles, steel, and aluminum.
These tariffs will impact many companies. However, analysts believe that small cap companies will be affected more than larger ones that do a lot of business internationally.
Trump has argued that his tariffs will not apply to companies manufacturing items in the US. However, many firms that do business in the US rely on imported raw materials and parts, which will be tariffed.
The IWM ETF has also crashed as analysts predict that these tariffs will lead to a recession in the US. Goldman Sachs analysts raised their recession estimates to 35%, joining other companies like PIMCO and Bank of America. A recession would hit small caps harder.
The silver lining in the Russell 2000 index crash
While the ongoing IWM ETF crash is not good, there is a silver lining. First, unlike the Nasdaq 100 index, technology companies make up a tiny percentage of the fund. This is notable because these firms have no large exposure to the artificial intelligence industr, that is showing signs of slowing down.
Further, Trump’s tariffs may lead to a recession, putting pressure on the Federal Reserve to slash interest rates later this year. Historically, these stocks do well when the Fed is slashng interest rates as they did after the Global Financial Crisis and the Covid-19 pandemic.
Unlike large companies like Berkshire Hathaway that generate tons of net interest income, many small caps suffer when rates are high. That’s because many of them have higher debt loads.
Top Russell 2000 movers
The most notable top movers in the Russell 2000 index are Fubo TV, Root, Digital Turbine, Groupon, Compass, Sage Therapeutics, and LendingTree. All these firms have jumped by over 30%, with Fubo rising by 134%.
The other non-biotech laggard stocks are names like Sunnova, Open Lending, Ses AI, CleanSpark, and iRobot.
IWM ETF analysis
IWM chart by TradingView
The weekly chart shows that the IWM ETF has crashed in the past few months. It has dropped from a high of $245 to the current $199. It moved below the lower side of the ascending channel and the 50-week moving average.
Also, the MACD indicator has moved below the zero line, while the Relative Strength Index (RSI) is nearing the oversold level. Therefore, the stock will likely continue falling in the near term and then bounce back and retest its all-time high of $245.
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