Small Cap ETF Underperformance Signals Continuing Investor Fears

Words may not be able to bring Christina Aguilera down. But they're doing a heck of a job on the psyche of the U.S. investor.

Unemployment has hit a 16-year high. The total number of job losses in 2008 outpaced any year since 1945. Stocks in '08 logged their worst calendar outing since, yep... the Great Depression.

Of course, these "words" should be put into some sort of perspective. 7.2% unemployment is nowhere near the double-digit levels of the early 80's, even if we are heading in that direction. And the current recession is certainly not representative of the 25% unemployment seen in the 1930s.

But I digress. After all, our worst fears are reality... until there's a reason to be greedy again.

Fear is most evident in the small-cap arena; that is, the small companies in the iShares Russell 2000 Fund (IWM) collectively fell 3.70% on Friday. The iShares Russell 1000 (IWB) fell much less, losing 2.15%.

Ordinarily, I might not make a big deal out of the difference. Yet throughout the bear market, every time that smaller companies seemed to be making a credible run, fear of an unknown future smacked them down. (Sticks and stones break bones, yet names for the current economy have been hurting plenty!)

Consider the first full trading week of January -- the 5th through the 9th. The iShares Russell 2000 Fund (IWM) started out with the best intentions, only to finish behind the iShares Russell 1000 (IWB) on the final day of the week.

In my estimation, the ongoing small-cap underperformance in the U.S. presents one of the biggest hurdles to investor confidence. More specifically, when the markets look 6-9 months out on the horizon for an economic recovery, bigger gains for smaller companies would be a sign of increasing faith. Alas... we're just not there yet.

Overseas, however, small-caps may be making a statement. Since the 15-month worldwide bear effectively began, here's how large Japanese companies via iShares Japan (EWJ) and small Japanese companies via WisdomTree Small Japan (DFJ) have performed. Is there more faith in economic recovery overseas?

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Comments

[Roger Schre...:]

Gary,

I think you better look a more carefully at the charts.... RJS

Jan 11 12:18 PM

[win:]

Thank you.

Jan 12 06:20 AM