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Summary

  • The iShares Core S&P Small-Cap ETF was the No. 3 performer ranked by January-July returns among the three most popular ETFs based on the S&P 1500's constituent indexes.
  • Meanwhile, the fund's adjusted daily closing share price last month contracted to $105.86 from $112.09, a reduction of -$6.23, or -5.56 percent.
  • Seasonality analysis and U.S. Federal Reserve policy shifts indicate the fund's weakness could continue in the third quarter.

The iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) ranked third by returns during the initial seven months of the year among the three most popular exchange traded funds based on the S&P 1500's constituent indexes, which also encompass the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) and the SPDR S&P MidCap 400 ETF (NYSEARCA:MDY).

IJR fell to $105.86 from $108.51, a tumble of -$2.65, or -2.44 percent, over the period. The small-capitalization ETF thus underperformed the large-cap SPY, which was up 5.51 percent, and the middle-cap MDY, which was up 2.61 percent.

Accounting for its three-to-one share split in 2005, IJR hit an all-time high of $114.28 intraday on July 1, a number I consider important because of its proximity to the estimate promulgated in my "SPY, MDY And IJR At The Fed's QE3+ Market Top" in March.

Figure 1: IJR Monthly Change, 2014 Vs. 2001-2013 Mean

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted closing monthly share price data at Yahoo Finance.

IJR behaved much worse in the first seven months of this year than it performed in the comparable periods of its initial 13 full years of existence, based on the means calculated by employing data associated with that historical time frame (Figure 1). The same data set shows the average year's weakest quarter was the third, with a small negative return, and its strongest quarter was the fourth, with a large positive return.

Figure 2: IJR Monthly Change, 2014 Vs. 2001-2013 Median

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted closing monthly share price data at Yahoo Finance.

IJR behaved much worse in the first seven months of this year than it performed in the comparable periods of its initial 13 full years of existence, based on the medians calculated by using data associated with that historical time frame (Figure 2). The same data set shows the average year's weakest quarter was the third, with a relatively small positive return, and its strongest quarter was the fourth, with an absolutely large positive return.

Don't Fight The Fed

The Federal Reserve appears to be on track to announce the end of its current quantitative easing program in October and the beginning of its next round of interest rate hikes in April. (Personally, I believe the former is more likely than is the latter.) Therefore, both the Fed and seasonality seem like strong headwinds for IJR, which may be poised to continue significantly underperforming both its S&P 1500 siblings, SPY and MDY, in the foreseeable future.

This assessment was bolstered by commentary in the Monetary Policy Report presented by Fed Chair Janet L. Yellen to the U.S. Congress in Washington July 15:

Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities. Nevertheless, valuation metrics in some sectors do appear substantially stretched -- particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of 'reach for yield' behavior by some investors.

If Fed speakers are talking about equity market valuation metrics in any sectors appearing substantially stretched, then I am hearing them. Loud and clear.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.

Source: IJR: January-July 2014 Performance And Historical Seasonality