Are New ETFs Late to the Small-Cap Party?

Includes: EES, IJR, IWM, VB
by: Tom Lydon

Small-capitalization stocks and related ETFs have usually led the markets as an economy recovers, and so far, the scenario has played out accordingly. Fund providers have rolled out a slew of new small-cap ETFs, but are they too late?

The Russell 2000 index of small-cap U.S. stocks has returned about 49% in the past year as compared to 40% for larger companies on the Russell 1000, reports Ian Salisbury for The Wall Street Journal.

And don’t forget that during the 36 months following each of the last 15 recessions, small-caps outperformed large caps by an annualized average of 5.6%. And this time it looks to be true, as well: in the last six months, small-caps are up about 14% while large-caps are up about 4%.

Fund providers have responded to the surge in small-caps with new niche ETFs targeting both domestic and international small-cap sectors.

Research has suggested that investors should have bought small-caps around the time when the economy stopped shrinking and started to grow again, which many economists believe to have taken place last fall.

As we always say: you can’t fight the trend. In small-caps, it’s there. And thanks to ETFs, there are more ways than ever to get your fix. It’s also important to note that the small-cap trend isn’t exactly a new one: since 2000, small-caps have outperformed large-caps in every year but one: 2007. That’s nothing to sniff at.

PowerShares recently launched nine small-cap U.S. sector ETFs that already appear to be popular additions to the market.

IndexIQ has also recently launched small-cap ETFs aimed at small companies in countries like Canada and South Korea.

Van Eck also launched one targeting Latin America last month.

If you’re fearful that you’re late to the party, try an incremental approach to getting into small-caps by putting in half of what you’d like to invest, wait for the position to appreciate 5%, then invest the other half. This keeps you from being fully in all at once – just in case. And, of course, don’t forget that strategy. [How to Follow Trends.]

Some other “old timer” small-caps ETFs include:

  • iShares Russell 2000 Index Fund (NYSEARCA:IWM)

  • iShares S&P SmallCap 600 (NYSEARCA:IJR)

  • Vanguard Small-Cap ETF (NYSEARCA:VB)

  • WisdomTree SmallCap Earnings (NYSEARCA:EES)

Max Chen contributed to this article.

Disclosure: None