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Small cap stocks (market cap between $50 million - $2 billion) are considered to be attractive long term investment plays because they are generally under-owned and have a superior growth potential vis-à-vis large caps. For example, a small-cap biotech company can probably double its earnings much faster than a Walmart or a Microsoft.

Similarly, small-cap ETFs are known for their high-risk/high-return potential and they are increasingly finding a prominent place in most long term investment portfolios like IRA investments, 401K investments and other retirement investment portfolios.

In order to decrease price volatility and capital risk in their investment portfolios, many investment professionals and fund managers prefer asset allocations to small cap “blend” ETFs. Let us take a closer look at U.S. small cap blend ETFs and compare their recent performance to various asset classes.

Major Asset Classes Trend

12/05/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

Intermediate Treasuries

IEF

-0.42%

0.04%

0.14%

8.82%

10.92%

3.9%

Gold

GLD

0.41%

-4.38%

-8.69%

11.19%

20.28%

3.76%

US Stocks

VTI

5.65%

-0.17%

7.75%

-2.13%

5.2%

3.26%

Municipal Bonds

MUB

0.22%

0.49%

1.39%

4.22%

8.36%

2.94%

Total US Bonds

BND

-0.06%

-0.35%

0.32%

3.78%

6.12%

1.96%

US Equity REITs

VNQ

4.43%

-3.1%

1.78%

-4.82%

5.78%

0.81%

International Treasury Bonds

BWX

2.65%

-2.23%

-4.2%

-3.21%

6.12%

-0.18%

Commodities

DBC

2.45%

-2.71%

-7.25%

-7.59%

4.94%

-2.03%

International Developed Stks

EFA

6.07%

-1.25%

-0.7%

-12.91%

-7.49%

-3.26%

Emerging Market Stks

VWO

6.91%

-2.29%

-3.46%

-13.7%

-10.3%

-4.57%

US Equity Style Trend

12/05/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

Russell Largecap Growth

IWF

4.98%

-0.12%

7.31%

-0.11%

5.56%

3.52%

Russell Largecap Blend

IWB

5.4%

-0.19%

7.48%

-2.02%

4.25%

2.98%

Russell Smallcap Growth

IWO

7.38%

0.4%

9.76%

-4.52%

1.65%

2.93%

Russell Largecap Value

IWD

5.98%

0.08%

7.83%

-3.79%

3.07%

2.63%

Russell Smallcap Blend

IWM

7.12%

0.42%

9.62%

-5.38%

-0.49%

2.26%

Russell Midcap Growth

IWP

5.71%

-0.4%

7.06%

-4.83%

2.64%

2.03%

Russell Midcap Value

IWS

5.77%

-0.3%

7.32%

-5.36%

2.43%

1.97%

Russell Midcap Indedx

IWR

5.71%

-0.47%

6.96%

-5.16%

1.98%

1.8%

Russell Smallcap Value

IWN

6.97%

0.35%

9.48%

-6.34%

-2.77%

1.54%

For more on the performance of various asset classes, see here

The data given above shows us that U.S. stock ETFs have done decently over the past financial year with only U.S. bond and gold linked ETFs outperforming. However, when we look at the various U.S. equity “style” ETFs, we find that small-cap blend ETFs are among the worst performing. The chief reason for this underperformance is the high domestic unemployment rate (close to 9%) in the United States. Having said that, we can safely assume that U.S. small cap blend ETFs will begin to outperform other equity ETFs once domestic GDP growth and job-creation accelerate.

Let’s take a closer look at some prominent and liquid U.S. small cap blend ETFs that trade currently.

U.S. Small Cap Blend

12/02/2011

Description

Symbol

1 Yr

3 Yr

5 Yr

Avg. Volume(NYSE:K)

1 Yr Sharpe

iShares S&P SmallCap 600 Index

IJR

3.43%

21.18%

1.21%

2,004

15.72%

Vanguard Small Cap ETF

VB

0.85%

23.44%

1.49%

445

3.58%

Schwab U.S. Small-Cap ETF

SCHA

0.79%

NA

NA

202

3.26%

iShares Russell 2000 Index

IWM

-0.85%

20.15%

0.05%

77,227

-3.84%

iShares Russell Microcap Index

IWC

-5.14%

16.54%

-4.67%

96

-22.58%

See here, for more on ETFs linked to various asset classes.

IWM is clearly the most liquid ETF (77,227K avg. daily volume) from the list given above. It also has decent 3 Yr returns (20.15%). However, IJR has the best 1 yr return (3.43%) along with the best Sharpe ratio (15.72%) and some decent volumes (2,004 K daily avg.). Keeping these facts in mind, let us consider the core holdings and sector allocation for IJR.

Top 10 Holdings (6.03% of Total Assets)

Company

Symbol

% Assets

Regeneron Pharmaceuticals, Inc.

REGN

0.90

Healthspring, Inc. Healthspring

HS

0.79

World Fuel Services Corporation

INT

0.61

Signature Bank

SBNY

0.56

Questcor Pharmaceuticals, Inc.

QCOR

0.55

National Retail Properties Comm

NNN

0.55

CLARCOR Inc. Common Stock

CLC

0.53

Tanger Factory Outlet Centers,

SKT

0.52

Piedmont Natural Gas Company, I

PNY

0.51

Biomed Realty Trust Common Stoc

BMR

0.51

Sector Weightings (%)

Sector

IJR

Basic materials

4.92

Consumer cyclical

14.95

Financial services

11.37

Realestate

8.05

Consumer defensive

4.98

Healthcare

10.36

Utilities

4.40

Communication services

0.72

Energy

3.97

Industrials

18.13

Technology

18.14

IJR is a small cap blend ETF linked to the iShares S&P SmallCap 600 Index. IJR’s top ten portfolio holdings constitute only 6% of its total assets making it a fairly diversified small cap ETF. IJR’s core holdings include a good balance of fast growing biotech companies like Regeneron Pharmaceuticals (NASDAQ:REGN), Questcor Pharmaceuticals (QCOR), regional banks like SBNY and defensive plays like World Fuel Services Corp (NYSE:INT) and Peidmont Natural Gas Company (NYSE:PNY). IJR’s sector break-up shows a similar balance between aggressive growth sectors like technology (18.14%), financial services (11.37%) and classic defensives like consumer syclicals (14.95%), healthcare (10.36%) and utilities (4.4%).

Keeping the above facts in mind, we can conclude that IJR will significantly outperform other U.S. equity style ETFs once local economic growth picks up and unemployment starts falling. At the same time, IJR will continue to remain volatile and under-perform its peers as long as the current jobless growth scenario continues and the European debt crisis is not solved conclusively.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: A Look At Recent Performance Of U.S. Small Cap Blend ETFs