Small-Cap ETFs: Recovery Leaders or Laggards?

| About: Vanguard Small (VB)

Small-caps seized spotlight in 2009. But will this asset class and its related ETFs keep the good times rolling on into the new year? Small-caps had a nice 2009: The Russell 2000 Index, gained 28.7% through Dec. 24 after declining 34.8% in 2008, and the S&P Small Cap 600 index, rose 25.6% after dropping 32% in the preceding year.

David Bogoslaw for BusinessWeek explains that the Fed’s anticipated withdrawal of some of the massive liquidity it pumped into a crisis-ridden financial system suggest that small-cap stocks won’t perform as well as larger ones in the year ahead.

Bear in mind, though, that the recovery is not firm yet. We’re in for a long slog, many analysts believe. Although banks seem to be doing better, Main Street is still ailing: job growth is not positive yet, and unemployment numbers remain at two-decade highs. A recovery environment historically favors small-caps.

Small-caps won’t always be in favor, though, so watch the trend lines and have your stop losses in place.

The new year is going to be a test for all companies, as investors watch for the ones that can meet their sales and profit forecasts but also start providing guidance again for future earnings.

  • Vanguard Small-Cap ETF (NYSEArca: VB): up 38.3% year-to-date

  • PowerShares FTSE/NASDAQ Small-Cap (NYSEArca: PQSC): up 34.8% year-to-date

  • iShares Russell 2000 Index Fund (NYSEArca: IWM): up 29.9% year-to-date

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