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 | -0.42% | 0.04% | 0.14% | 8.82% | 10.92% | 3.9% | |
Gold | 0.41% | -4.38% | -8.69% | 11.19% | 20.28% | 3.76% | |
US Stocks | 5.65% | -0.17% | 7.75% | -2.13% | 5.2% | 3.26% | |
Municipal Bonds | 0.22% | 0.49% | 1.39% | 4.22% | 8.36% | 2.94% | |
Total US Bonds | -0.06% | -0.35% | 0.32% | 3.78% | 6.12% | 1.96% | |
US Equity REITs | 4.43% | -3.1% | 1.78% | -4.82% | 5.78% | 0.81% | |
International Treasury Bonds | 2.65% | -2.23% | -4.2% | -3.21% | 6.12% | -0.18% | |
Commodities | 2.45% | -2.71% | -7.25% | -7.59% | 4.94% | -2.03% | |
International Developed Stks | 6.07% | -1.25% | -0.7% | -12.91% | -7.49% | -3.26% | |
Emerging Market Stks | 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 | 4.98% | -0.12% | 7.31% | -0.11% | 5.56% | 3.52% | |
Russell Largecap Blend | 5.4% | -0.19% | 7.48% | -2.02% | 4.25% | 2.98% | |
Russell Smallcap Growth | 7.38% | 0.4% | 9.76% | -4.52% | 1.65% | 2.93% | |
Russell Largecap Value | 5.98% | 0.08% | 7.83% | -3.79% | 3.07% | 2.63% | |
Russell Smallcap Blend | 7.12% | 0.42% | 9.62% | -5.38% | -0.49% | 2.26% | |
Russell Midcap Growth | 5.71% | -0.4% | 7.06% | -4.83% | 2.64% | 2.03% | |
Russell Midcap Value | 5.77% | -0.3% | 7.32% | -5.36% | 2.43% | 1.97% | |
Russell Midcap Indedx | 5.71% | -0.47% | 6.96% | -5.16% | 1.98% | 1.8% | |
Russell Smallcap Value | 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(K) | 1 Yr Sharpe |
iShares S&P SmallCap 600 Index | 3.43% | 21.18% | 1.21% | 2,004 | 15.72% | |
Vanguard Small Cap ETF | 0.85% | 23.44% | 1.49% | 445 | 3.58% | |
Schwab U.S. Small-Cap ETF | 0.79% | NA | NA | 202 | 3.26% | |
iShares Russell 2000 Index | -0.85% | 20.15% | 0.05% | 77,227 | -3.84% | |
iShares Russell Microcap Index | -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)
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Sector Weightings (%)
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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 (REGN), Questcor Pharmaceuticals (QCOR), regional banks like SBNY and defensive plays like World Fuel Services Corp (INT) and Peidmont Natural Gas Company (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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
