Time To Get Into Small-Cap Value ETFs?

 |  Includes: FYT, IWM, SLYV, SPY, VIOV
by: Tom Lydon

The economic climate for small-cap value exchange traded funds could be right for the remainder of 2013. Smaller companies tend to deliver higher risk-adjusted returns than large-caps and could be a nice momentum play.

"Investors should note that small caps were underperforming in the early part of the second quarter but are now leading the way. Since small caps are considered to be the barometer of domestic economy, their dominance gives a bullish outlook for the U.S. in the near term," Zacks Equity Research wrote.

Over the past three months, the iShares Russell 2000 (NYSEARCA:IWM) has gained 7.4%, compared to the broad market SPDR S&P 500 (NYSEARCA:SPY) that has added 4%. It has been noted that small-cap stocks tend to outperform large-caps during an economic recovery. Overall, this asset class also tends to add value to a portfolio, and reduces overall risk.

In general, the market is presenting investors with an uncertain outlook, as recent drama in Syria has subsided. Investors who want to focus in more on domestic stocks will benefit from small-cap ETF exposure, as these companies do not combine international diversification. Smaller companies represent their respective domestic markets.

The following ETFs are some of the top-ranked small-cap ETFs by Zacks. SPDR S&P 600 Small Cap Value ETF (NYSEARCA:SLYV) is up 5.8% over the past three months, and up 20.6% in 2013. The financial and industrial sectors are top weightings. Vanguard S&P Small Cap 600 Value ETF (NYSEARCA:VIOV) is up 6.4% and has gathered 21.5% year-to-date. Similar to SLYV, VIOV is heavy on the financial and industrial sectors.

Another ETF that tracks the same theme is the First Trust Small Cap Value AlphaDEX Fund (NASDAQ:FYT) which is up 4.5% over the past three months. Year-to-date the ETF is up 21.1%. The fund weights heavily toward industrials and consumer discretionary.

Take note, the possibility for higher returns and more growth potential does come at a price. Smaller companies carry more risk and can present more volatility since they are in a growth phase. However, small-caps make great momentum plays and can properly diversify a portfolio.

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon's clients own IWM.

Disclosure: I am long IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.