The iShares Russell 2000 ETF (NYSE:IWM) attracted more than $1.7 billion in inflows on April 1, as per data provided by ETF.com. The large number may be an indication of rising interest in this segment of the market after the recent volatile performance.

In March, the Russell 2000 Index dipped more than 10% from its recent high, becoming the first U.S. benchmark to go into correction territory this year. The decline came amid sharp swings in March, when small-cap stocks were underperforming due to rising macro risks and the impact of rising borrowing costs.

However, on April 1, with the beginning of the new financial year, the index gained 1.6% as investors attempted to bet on the end of the Iran war by buying momentum stocks.

Rotation, Not Yet A Leadership Shift

Despite the intermittent rebounds in the small-cap stocks, the sentiment remains uncertain compared to the large-cap stocks. One big reason behind this is that small-cap firms are highly reactive to interest rate hikes, because they rely heavily on borrowing to execute capital-intensive growth projects. Right now, according to the CME Fed Watch tool, the probability of cutting interest rates this year is negligible. Also, last week, futures market traders raised the odds of a rate hike by the end of 2026 to 52%, making it the first time it has crossed the 50% mark, according to the FedWatch tool.

The recent inflows into the ETF may be tactical in nature. The recent performance of the large-cap stocks, such as the technology sector, has been wavering, having lost around 8% year-to-date. The stocks in this sector may be showing signs of fatigue after the recent run. This may be another the reason for the shift in interest toward small-cap stocks.

Moreover, the earnings visibility is less certain for small cap stocks compared to large-cap ones. These have all contributed to mixed results so far this year, where stocks have seen significant run-ups followed by equally quick pullbacks.

ETF Options Beyond IWM

Apart from IWM, there are other ETFs that can be used as a proxy for small-cap stocks. These include Vanguard Russell 2000 ETF (NASDAQ:VTWO) and SPDR Portfolio S&P 600 Small Cap ETF (NYSE:SPSM). These two are similar to IWM but have different methodologies and cost structures. For instance, expense ratio for SPSM is 0.03%, and that of VTWO is 0.06%, as compared to IWM’s 0.19%, making them more cost effective.

The increase in flows into small-cap stocks may be seen as a renewed interest in small-cap stocks for now. However, the outlook for small-cap stocks continues to depend on the overall macroeconomic outlook.