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Global markets are being totally regulated by the Russia-Ukraine crisis lately. Overall, the S&P 500 (down 3.1%), the Nasdaq composite (down 3.43%) and the Dow Jones (down 3.5%) recorded losses in the past month. Only the small-cap Russell 2000 (up 0.97%) managed to remain in the green (as of Feb 28, 2022).
However, the winning trend of Nasdaq and the Russell 2000 has been pronounced in the past week amid heightened crisis. The Nasdaq composite has inched up 1.5% in the past week against a 0.6% dip in the Dow Jones and a 0.6% uptick in the S&P 500. The Russell 2000 has also expanded 1.9% in the past week (as of Feb 28, 2022).
This puts the Nasdaq ETFs like Invesco QQQ Trust (QQQ - Free Report) and Invesco NASDAQ 100 ETF (QQQM - Free Report) and small-cap index ETFs likeiShares Russell 2000 ETF (IWM - Free Report) and SPDR S&P 600 Small Cap ETF in sweet spots.
Let’s discuss the driving forces of those indexes and their ETFs. Before that we briefly present the geopolitical tensions going on in Russia and Ukraine.
Behind the Geopolitics
In late February, Russia began sending troops to the two breakaway regions of eastern Ukraine, namely Donetsk and Luhansk. In response, the United States and its allies levied sanctions against Russia targeting financial institutions, sovereign debt and oligarchs in the country. Germany too halted the approval of the gas pipeline Nord Stream 2 after Russia’s actions.
However, while such measures failed to hold Russia back from invading Ukraine, sanctions started mounting as an anti-war wave swept the world. The war between the duo (Russia and Ukraine) took an ugly turn in late February. Russian President Vladimir Putin put his country’s nuclear deterrence forces on high alert Sunday.
Among some of the important sanctions, Russian banks are barred from SWIFT. General Motors and Harley Davidson put off some business in Russia. BP Plc will exit its stake in Russia’s Rosneft. Thanks to the rising sanctions, the Russian ruble slumped about 30% against the U.S. dollar to start the week amid an all-time low scenario as markets assessed the impact of sanctions on the Russian assets. Russia’s central bank more than doubled the key interest rate to 20% to boost the tumbling ruble.
Why Nasdaq Is Better-Positioned
The long-term fundamentals of the tech-heavy Nasdaq are sound. The index has fared worse in the past few weeks due to rising rate worries (emanated from the Fed policy-tightening fear). Since tech stocks that are high-growth in nature underperform in a rising rate environment, the Nasdaq has been down 12.5% this year so far, worse than the 8.2% losses recorded by the S&P 500.
But geopolitics changed the scenario by boosting the safe-haven assets like the U.S. treasury bonds, thus pushing down the bond yields. As bond yields are subdued now, growth stocks found a reason to rally. Moreover, the Fed rate hike bet is more-or-less priced in now at the current valuation. So, more severe punishment to the Nasdaq by investors is less likely.
If this was not enough, tech stocks that revolve around cyber security and cloud computing are likely to soar as bitter tensions between Russia and the West may cause massive cyber-attacks, at global levels. Experts with the concerned companies are already gearing up for offsetting the threats (read: Time for Cyber Security ETFs Amid Russia-Ukraine Tensions?).
Plus, the consumer sector seems to have held its head high as evident from its latest jump in the retail sales. The Nasdaq has considerable exposure to the consumer sector. This is yet another positive for the fund.
Why Russell 2000 Should Win
The chief reason for small-cap stocks’ winning run at the moment is their greater domestic exposure and less focus on the foreign business and consumers. Many large-cap companies got involved in the Russia tensions but small-caps have the privilege to stay unscathed and yet enjoy the U.S. economy’s growth momentum. Investors should note that the U.S. dollar is gaining right now. This would cut the earnings strength of large-cap companies with huge foreign exposure.
Plus, small-cap stocks, which since 2010 have topped the large-cap competitors when inflation forecasts rose, according to CME Group, as quoted on the Motley Fool. Plus, if lack of shipping capacity is becoming an issue now, small caps stand to gain here as these are normally domestically-focused and less dependent on the overseas backdrop as well as the huge requirement of shipping.
In the past year, the large-cap S&P 500 has gained about 10%, while the S&P 600 has lost 3.6%. No wonder the small-cap index, which carries a cheaper valuation, has the potential to surge once the domestic economy recovers fully.
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Best Index ETFs to Play Russia-Ukraine Tensions
Global markets are being totally regulated by the Russia-Ukraine crisis lately. Overall, the S&P 500 (down 3.1%), the Nasdaq composite (down 3.43%) and the Dow Jones (down 3.5%) recorded losses in the past month. Only the small-cap Russell 2000 (up 0.97%) managed to remain in the green (as of Feb 28, 2022).
However, the winning trend of Nasdaq and the Russell 2000 has been pronounced in the past week amid heightened crisis. The Nasdaq composite has inched up 1.5% in the past week against a 0.6% dip in the Dow Jones and a 0.6% uptick in the S&P 500. The Russell 2000 has also expanded 1.9% in the past week (as of Feb 28, 2022).
This puts the Nasdaq ETFs like Invesco QQQ Trust (QQQ - Free Report) and Invesco NASDAQ 100 ETF (QQQM - Free Report) and small-cap index ETFs likeiShares Russell 2000 ETF (IWM - Free Report) and SPDR S&P 600 Small Cap ETF in sweet spots.
Let’s discuss the driving forces of those indexes and their ETFs. Before that we briefly present the geopolitical tensions going on in Russia and Ukraine.
Behind the Geopolitics
In late February, Russia began sending troops to the two breakaway regions of eastern Ukraine, namely Donetsk and Luhansk. In response, the United States and its allies levied sanctions against Russia targeting financial institutions, sovereign debt and oligarchs in the country. Germany too halted the approval of the gas pipeline Nord Stream 2 after Russia’s actions.
However, while such measures failed to hold Russia back from invading Ukraine, sanctions started mounting as an anti-war wave swept the world. The war between the duo (Russia and Ukraine) took an ugly turn in late February. Russian President Vladimir Putin put his country’s nuclear deterrence forces on high alert Sunday.
Among some of the important sanctions, Russian banks are barred from SWIFT. General Motors and Harley Davidson put off some business in Russia. BP Plc will exit its stake in Russia’s Rosneft. Thanks to the rising sanctions, the Russian ruble slumped about 30% against the U.S. dollar to start the week amid an all-time low scenario as markets assessed the impact of sanctions on the Russian assets. Russia’s central bank more than doubled the key interest rate to 20% to boost the tumbling ruble.
Why Nasdaq Is Better-Positioned
The long-term fundamentals of the tech-heavy Nasdaq are sound. The index has fared worse in the past few weeks due to rising rate worries (emanated from the Fed policy-tightening fear). Since tech stocks that are high-growth in nature underperform in a rising rate environment, the Nasdaq has been down 12.5% this year so far, worse than the 8.2% losses recorded by the S&P 500.
But geopolitics changed the scenario by boosting the safe-haven assets like the U.S. treasury bonds, thus pushing down the bond yields. As bond yields are subdued now, growth stocks found a reason to rally. Moreover, the Fed rate hike bet is more-or-less priced in now at the current valuation. So, more severe punishment to the Nasdaq by investors is less likely.
If this was not enough, tech stocks that revolve around cyber security and cloud computing are likely to soar as bitter tensions between Russia and the West may cause massive cyber-attacks, at global levels. Experts with the concerned companies are already gearing up for offsetting the threats (read: Time for Cyber Security ETFs Amid Russia-Ukraine Tensions?).
Plus, the consumer sector seems to have held its head high as evident from its latest jump in the retail sales. The Nasdaq has considerable exposure to the consumer sector. This is yet another positive for the fund.
Why Russell 2000 Should Win
The chief reason for small-cap stocks’ winning run at the moment is their greater domestic exposure and less focus on the foreign business and consumers. Many large-cap companies got involved in the Russia tensions but small-caps have the privilege to stay unscathed and yet enjoy the U.S. economy’s growth momentum. Investors should note that the U.S. dollar is gaining right now. This would cut the earnings strength of large-cap companies with huge foreign exposure.
Plus, small-cap stocks, which since 2010 have topped the large-cap competitors when inflation forecasts rose, according to CME Group, as quoted on the Motley Fool. Plus, if lack of shipping capacity is becoming an issue now, small caps stand to gain here as these are normally domestically-focused and less dependent on the overseas backdrop as well as the huge requirement of shipping.
In the past year, the large-cap S&P 500 has gained about 10%, while the S&P 600 has lost 3.6%. No wonder the small-cap index, which carries a cheaper valuation, has the potential to surge once the domestic economy recovers fully.