Published November 27, 2012
The fourth quarter can be a tricky time to own small-cap stocks and ETFs. Fund managers that are down on small-cap positions are apt to take those losses in an effort to gain some tax benefits before year-end. Then, if investors are feeling cheery to start the new year, professionals will reenter small market value equities, leading to the January Effect. That is the scenario where small caps spark a first-quarter rally.
Recent price action in the iShares Russell 2000 Index Fund (IWM) could be indicating small-caps are poised to rally. IWM, one of the marquee small-cap ETFs on the market, is up more than two percent in the past five trading days. However, over the past 30 and 90 days, the $14.9 billion has incurred modest losses.
Small caps are volatile. That is a fact of life, but IWM's recent ups and downs underscore the notion that there are other small-cap ETFs that could deliver more upside in a possible risk on rally. Consider these ETFs that have been outpacing IWM in recent months.
PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS) The PowerShares DWA SmallCap Technical Leaders Portfolio debuted in July, but its rookie status is not what makes this fund unique. Rather than being a traditional cap-weighted ETF, DWAS evaluates relative strength characteristics of various stocks before including them in the fund. Dorsey Wright selects possible constituents "from a small-cap universe of approximately 2,000 of the smallest U.S. companies selected from a broader set of 3,000 companies," according to PowerShares.
From there, DWAS is whittled down to 200 holdings. At the sector level, DWAS is heavy on discretionary, financial services, health care and technology names. Favorable seasonal trends for discretionary names have helped DWAS rise 0.86 percent in the past month. Over the past 90 days, the ETF is up 0.94 percent. IWM is down over both time periods.
Market Vectors Indonesia Small-Cap ETF (IDXJ) The Market Vectors Indonesia Small-Cap ETF is another new small-cap ETF having come to market in March. Thus far, IDXJ has not been nearly as popular as its large-cap brethren such as the Market Vectors Indonesia ETF (IDX) and part of that has to do with timing as IDXJ debuted at a time when IDX was struggling while other emerging markets ETFs were on fire.
That means if Indonesian large-caps are struggling, it will be even harder for the country's more volatile small caps to gain traction with foreign investors. Recently, IDXJ has shown signs of life as some investors have started to view select Indonesian small caps as attractively valued.
A growth outlook for Indonesia, Southeast Asia's largest economy, buoys the case for a small position in IDXJ over the coming months. Over the past month, the fund is up one percent and since late August, IDXJ has gained two percent. Those performances indicate IDXJ could be a better bet than IWM if emerging markets ETFs come back into favor in significant fashion.
iShares Core S&P Small-Cap ETF (IJR) Same ticker, but a new twist on the old Shares S&P Small Cap 600 Index Fund. IJR is part of the new iShares core ETF suite, which features 10 ETFs with paltry expense ratios aimed cost-conscious investors. For its part, IJR now charges just 0.16 percent per year. That makes IJR slightly cheaper than IWM, which charges 0.23 percent.
It is not just the lower fees that make IJR appealing. Over the past week, month and three months the ETF has outpaced IWM. Not only that, but has the lower beta against the S&P 500 and a lower three-year standard-deviation, according to iShares data.
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