In Support of the Small Cap Rally

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

Small cap companies have been on a stunning rally for the last decade, beating large caps for all but one year since 2000. Not everyone is convinced, though. Should you be looking at small cap exchange traded funds or shunning them? Some market watchers suggest that now is the time for investing in small cap shares and ETFs. Others claim that there is a case against buying this asset class for now and that too many investors are chasing a “hot” corner of the market.

Stock Blog Hub counters the assertions with a few points:

  • Small caps have risen too fast, too soon: 90% of the time, small caps outperform large caps coming out of a recession. Stock Bog Hub reminds us that this is exactly what everyone said about the current bull market in April of last year. And that was after a mere 20% rebound off the bottom.
  • Ignore the trends: According to MarketWatch, the old trend following adage no longer applies because small caps have performed too well for too long. Trend following is one of the best ways to enhance a solid investment strategy and we always say it: you can’t fight the trend. It’s there.
  • Average investors don’t know much: One of the biggest objections to MarketWatch’s article is this: It assumes the average investor is an idiot. We know that is absolutely not true. From our dealings with readers, we know they’re incredibly smart and well-informed.

If you want to invest in small caps, but you’re feeling like this rally is overdone, you don’t need to worry. Having a stop-loss point will help protect you on the downside – just be sure that you use it!

  • 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)