Why Small-Cap ETFs Are Outperforming

Includes: IWC, IWM, PZI, SCHA
by: Tom Lydon

Small-cap and micro-cap ETFs have been following the path woven for them by market history: they have been leaving large-caps in the dust.

The outperformance of smaller and lower-quality stocks is typical in the first year of a bull market, and as the global economy struggles to rid itself out of this recession, this trend could remain in place. John Spence for MarketWatch reports that small-caps tend to beat large caps as cyclical sectors outperform defensive ones.

No one can say whether the rally will continue, or for how long, but you can’t ignore numbers like these:

  • In last three months, small-caps are up about 13% while large-caps are up about 4%
  • In the last six months, small caps are up about 15% and large caps are up about 10%

Consider this about small-caps, too: the largest companies in the United States today – the Googles, the Microsofts, the Home Depots – they all had to start somewhere. They were once small, and they got big. You never quite know who will be the next large-cap, though, so check out ETFs for broad exposure to the top small stocks and play them all.

Schwab U.S. Small-Cap (NYSEArca: SCHA)

iShares Russell 2000 Index (NYSEArca: IWM)

iShares Russell Microcap Index (NYSEArca: IWC)

PowerShares Zacks Micro Cap (NYSEArca: PZI)