New Smallcap ETF Opportunities Multiply

by: Tom Lydon

In the last month alone, ETF providers have dished out more than a dozen small-cap funds in hopes that the historical tendency of small-caps to outperform in recoveries will continue to repeat itself.

For the last six months, small-caps have gained about 18%, leaving large-caps, which have gained about 10%, in the dust. It’s certainly easy to see the appeal of small-caps on the part of both providers and investors, and now there are more ways to play these stocks than ever before.

In the past month, fund providers PowerShares, Van Eck and IndexIQ have issued more than a dozen small-cap ETFs, and many of the new small-cap ETFs are focused on specific industries, allowing investors to pick and choose the most attractive areas of the markets, writes Cinthia Murphy for IndexUniverse.

Many believe the saying that small-caps lead the way out of a recession, and as of March 31, assets under U.S. small-cap ETFs had grown 87% year-over-year, compared to large-cap ETFs’ growth of 43% in the same period. The investors’ choice in small-cap ETFs have also eliminated single-company risk since the funds hold multiple stocks from a benchmark index.

Invesco PowerShares Managing Director and Global Head of ETFs Ben Fulton told us recently that PowerShares found that not only is outperformance typically seen in the first year of a recovery, but it tends to go on for at least another 36 months. “If past recessions and recoveries are any indication, we believe there’s a couple years left in comparison to large-caps,” says Fulton.

Sam Stovall, chief investment officer at Standard & Poor’s, believes small-cap companies will lead the economic recovery because they will spur new growth through job creation and mergers and acquisitions. U.S. small-cap ETFs have been performing exactly as expected, with double-digit gains last year and year-to-date returns of between 15% and 20%.

  • iShares Russell 2000 Index Fund (NYSEARCA:IWM)
  • iShares S&P SmallCap 600 (NYSEARCA:IJR)
  • Vanguard Small-Cap ETF (NYSEARCA:VB)

Adam Patti, president of IndexIQ, adds that Asian small-cap stocks are particularly attractive because the region wasn’t hit as hard by the crisis. Additionally, countries in that part of the world feed Chinese demand and could see “growth rates above historical norms.” IndexIQ is in the process of launching 13 country-specific small-cap ETFs targeting Asian economies and some commodities ETFs. So far, IndexIQ has rolled out three of its 13 planned small-cap funds.

  • IQ Australia Small Cap ETF (NYSEARCA:KROO)
  • IQ Canada Small Cap ETF (NYSEARCA:CNDA)
  • IQ South Korea Small Cap ETF (NASDAQ:SKOR-OLD)

PowerShares launched nine U.S. small-cap sector ETFs this month that focuses on energy, utilities, materials, consumer discretionary, consumer staples, industrials, health care, information technology and financials.

Van Eck currently has two small-cap emerging market ETFs under its wing: Market Vectors Latin America Small Cap Index ETF (NYSEARCA:LATM) and Market Vectors Brazil Small-Cap ETF (NYSEARCA:BRF).

Max Chen contributed to this article.

Disclosure: None