Five Domestic Small-Cap ETFs To Watch In 2011

One anecdote that was bandied about quite a bit in 2010 was that small-caps historically outperform their large-cap peers when the market is emerging from a recession and that did hold true last year with the Russell 2000 gaining 26%, almost double the return delivered by the S&P 500.

Sounds good, but the fun for small-caps may just be getting started. Bloomberg ran an interesting piece on Monday that featured bullish outlooks on small-caps from BlackRock and JPMorgan and some very telling statistics.

Feel wary about small-caps? Take a look at these numbers: Profits among smaller companies rose five times faster than larger ones last year, and analysts’ predictions show the outperformance will continue. The average company in the Russell 2000 posted a 165 per cent gain in income last year, the most since 2003, as S&P 500 profits rose 29 per cent, according to data compiled by Bloomberg.

Add to that an expected 80% jump in profits in 2011 for small-caps, almost quadruple the estimate for S&P 500 members and it’s time to freshen up on worthwhile small-cap ETFs for 2011.

Here are five non-leveraged domestic funds to get started with:

1) iShares S&P SmallCap 600 Index Fund:

IJR won’t follow the Russell 2000 directly because it is based on another index, but the fund is sensitive to the Russell 2000’s gyrations. In fact, IJR is a great trader’s ETF because it is pretty volatile as far as index funds go. Financial dominate the ETF at over 18%, but four other sectors get double-digit weights.

2) PowerShares S&P SmallCap Energy ETF:

XLES is a direct energy play and despite the slack volume, this is another fund that can have wide intraday moves. Patience will prove to be a virtue with XLES as the ETF should be a winner due to $100 oil and more energy industry consolidation.

3) Vanguard SmallCap ETF:

VB is heavy on financials, materials and consumer goods names, making it not much different than IJR in that regard, but as always, Vanguard is able to deliver a compelling reason to give its ETFs a look: Low fees.

4) Rydex S&P SmallCap 600 Pure Value ETF:

RZV emphasises the same sectors at IJR and VB, but with slightly different weights and the key difference here is a focus on less speculative value names. The ETF is up 27.4% in the past year, so if offered barely a better return than the Russell 2000.

5) iShares S&P SmallCap 600 Growth Index Fund:

If the stats proffered up by Bloomberg prove accurate, IJT could wind up being one of the ideal ways to get small-exposure this year as growth names are sure to benefit, if not be market leaders, as small-caps continue their ascent. Heavy on financials, IJT also offers solid exposure to tech and energy among other sectors.

— The ETF Professor


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