Why Small-Cap ETFs Could Be Ready to Rally

Includes: DES, GWX, IJR, VB
by: Tom Lydon

Investors are wondering if we are coming out of a recession, with the latest evidence suggesting that we are in a valuable period for small cap growth. This could give small cap ETFs the chance for a rally if a turnaround occurs.

Russell Investments research indicates that small-cap stocks tend to do well after a recession, indicating their possible outperformance once the market has hit its bottom. This theory has been reinforced since the market lows reached on March 9. Since then, Ian Wyatt for SmallCapInvestor says, the majority of stocks gaining on any particular day have been of the small-cap variety.

Why? Chalk it up to nimbleness. Small-caps can shift and change strategies as market conditions change much more easily than larger companies can.

Meanwhile, the iShares Russell 2000 (NYSEARCA:IWM) is up 45.9% off the March 9 market low. Traders are watching these indicators, although the jury is still out on whether a turnaround within the market has actually or will occur. Just remember, be ready with an entry and an exit strategy and watch the trend lines, because time will only tell.

Don’t forget about international small-caps, either. Many European small-caps are faring well in a down economy.

  • SPDR S&P International Small Cap (NYSEARCA:GWX): up 14.1% year-to-date

  • iShares S&P Small Cap 600 Index Fund (NYSEARCA:IJR): down 0.1% year-to-date

  • Vanguard Small Cap (NYSEARCA:VB): up 8.1% year-to-date

  • WisdomTree Small Cap Dividend Fund (NYSEARCA:DES): down 7.6% year-to-date