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Small U.S. stocks and related ETFs have outstripped the performance of others in the marketplace, but the fast pace may not last, according to some.

Since the March lows, small-cap U.S. stocks have gained 70% on average , but analysts warned that small stocks may begin to slow down, citing a deeply scarred economy, restrictive bank lending and high small-cap stock valuations, reports Sam Mamudi for MarketWatch.

One skeptical Lipper senior analyst, Tom Roseen, says that the continuing steep climb in small-cap shares is justifiable if profitability is there. Sam Dedio, manager of Artio US Smallcap Fund, has pointed out that a lot of the bailout money has not been given to small-cap financials and this would prolong the crisis for these smaller companies.

One factor that may hold back small-caps is valuations. Since 1995, the median PE ratio of large-caps is 20.7 whereas small-caps is. 24.6%. Today, average PE ratios of small-cap stocks is around 18 times 2010 earnings estimates while large-caps are around 14 times next year’s estimates, which shows that larger stocks have a greater upside potential.

Some experts remain optimistic about small-caps, pointing to historical references that showed small-caps to greatly outperform mid- and large-caps. Furthermore, analysts believe year-over-year small-cap earnings will jump 86% on average, compared to a 34% rise for large-caps.

Before jumping into any investment or ETF, be sure to watch the trend lines. We utilize the 200-day moving average to determine our course of action.

  • Vanguard Small Cap Value ETF (NYSEArca: VBR): up 16.4% year-to-date


  • PowerShares Dynamic Small Cap (NYSEArca: PJM): up 5.3% year-to-date


  • SPDR Dow Jones Small Cap Value (NYSEArca: DSV): up 23.4% year-to-date


Max Chen contributed to this article.