On August 16th, Goldman Sachs Group (NYSE: GS) filed their form 13F-HR with the SEC, disclosing their equity holdings and quarterly transaction. The most notable move in the past quarter sits right at the top of Goldman’s largest positions: the company shifted their largest equity exposure from the SPY (S&P 500) to the IWM (Russell 2000). This is a notable, as it marks the reallocation of their overall portfolio from the larger cap S&P to the smaller cap Russell.
Why is this so important? Well, small caps tend to outperform to the upside, and underperform to the downside. When stocks rise, the small caps rise most, and when stocks fall, the small caps fall most. In shifting their index exposure from large to small caps, it is a move on Goldman’s part to take on more risk with regard to the indices and to generate more upside exposure. As economies recover from deep demand side slumps, typically the next leg up in markets is driven by young, innovative companies, and where do we find such companies? Look no further than the Russell 2000 .
Admittedly, there are far more variables that come into play than can meet the eye in this filing alone. Goldman holds positions in other asset classes and we do not know exactly how these positions are designed to balance out their broader exposure. However, the magnitude with which Goldman increased their Russell exposure speaks volumes about their sentiment towards markets: they raised their IWM position by 22.85% and only trimmed off 9.72% from the SPY, in the process adding to their overall stock market index exposure.
On Friday, the Russell 2000 led the broader indices higher, while on Monday’s sell-off, the index held up far better than its larger cap counterparts. And, once again today, the Russell is pacing the broader markets to the upside. Watch this index closely as a sentiment gauge for markets in the coming days as we look to break this volatile and choppy range. If Goldman is half as smart as we all make them out to be, then this action certainly does not indicate too much concern about a double-dip on their part.