The iShares Russell 2000 ETF pulled in $2.93 billion of investor flows for the week, the most of any fund and more than triple its closest competitor, the Energy Select SPDR, which saw inflows of $766.1 million.
Among market watchers there were several explanations: The group likely had become cheap after suffering through a huge autumn discount. Investors also were looking for U.S.-centric plays amid global weakness, particularly in Europe. And for some, the move showed a healthy general appetite for risk despite all the market ups and downs.
"With the tailwind of strong, resilient, US economic data (jobless claims, manufacturing) small caps are now finally outperforming large caps in the stock market, high yield is outperforming investment grade and interest rates ended (Thursday) modestly higher," Hans Mikkelsen, credit strategist at Bank of America Merrill Lynch, said in a note to clients. "These developments are encouraging and support our view that the financial markets' reaction to global weakness is overdone."
Interestingly, a separate report from BofAML's chief investment strategist, Michael Hartnett, issued a caveat that the flows could be "ETF creation for new shorts," implying traders trying to push momentum in a space that they then seek to bet against.
But David Rosenberg, economist and strategist at Gluskin Sheff, said the overall move—the best Russell 2000 week in 14 years when comparing performance to the S&P 500—in small caps should help assuage those worried that the market is heading for more trouble.
"The privates and lieutenants always lead the colonels and generals and always in both directions," he said in his daily note. "This could be a very key confirmation that we are past the eye of the storm."