Eyeing a Ferocious Snap Back in Small Caps

Includes: FYX, IWC, IWM, PXSC, RWJ
by: Larry MacDonald

The rebound off market bottoms is usually explosive for small caps. Their average gain in the year following the past seven bear markets surpassed 30%, writes Viking Capital CEO John Sartz in the Nov. 21 edition of Investor’s Digest of Canada.

And once in, you might consider staying. Studies by leading academics such as Kenneth French and Eugene Fama find that small caps average 12% annually over the long run.

The current downturn for small caps is the worse of the past seven says Sartz. Small cap indexes are down by over half. Past declines were 28% to 43% from market peaks. The spring back after the 2008 bear could be exciting. 

We are in the midst of tax-loss selling season too and a lot of small caps are down for that reason. If past tendencies emerge, January could see good snap back.

So small-cap exchange-traded funds (ETFs) look like good places to deploy funds if you are one of the brave now looking to buy low and sell high. In Canada, there is the iShares CDN SmallCap Index Fund. In the U.S., there is:

• iShares Russell 2000 Index (NYSEARCA:IWM)
• iShares Russell Microcap Index (NYSEARCA:IWC)
• SPA Market Grader Small-Cap 100 (SSK)
• First Trust Small Cap Core AlphaDEX (NASDAQ:FYX)
• PowerShares Dynamic Small Cap (PJM)
• RevenueShares Small Cap (NYSEARCA:RWJ)