Small-Cap ETFs Showing Signs Rally is Endangered

If investors believe that small-cap stocks and the corresponding ETFs are accurate gauges of risk appetite then they might not like what some major small-cap ETFs have been saying in recent days.

Despite modest declines on Wednesday, the S&P 500, Dow Jones Industrial Average and the Nasdaq Composite are still in the green over the past five days. The same cannot be said of myriad small-cap ETFs, including two of the group's marquee constituents.

Factoring in Wednesday's losses, the iShares Russell 2000 Index Fund (NYSE:IWM) and the Vanguard Small-Cap ETF (NYSE:VB) are each off about 0.25 percent in the past five days. IWM has been turned back at the psychologically important $90 level while VB looks like it is in danger of falling below $85.

In the case of VB, a fund where high-beta sectors such as financial services and technology combine for 40 percent of the ETF's weight, a drop below $84.20 could send the ETF back to the $81 area to fill in a gap up that was made early this year.

IWM's chart is nearly identical. Regarding this ETF, a move below $88 probably takes it back to $85 to fill in an upward gap made earlier this year. Financial services and technology names combine for almost 37 percent of IWM's sector weight.

Interestingly, the phenomenon of small-cap vulnerability is not confined to U.S.-focused ETFs. Factor in a small loss Wednesday and the SPDR S&P Emerging Markets Small Cap (NYSE:EWX) is also off 0.25 percent in the past week. That could be a sign of things to come with Taiwanese and Chinese small-caps as those countries combine for over 45 percent of EWX's weight.

A small loss on Wednesday means the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE:DGS) is down over the past week. In addition to an almost 23 percent allocation to Taiwan, DGS is also struggling because South Korean and Malaysia small-caps combine for 19 percent of the ETF's weight. South Korea and Malaysia are the only major Asian markets that are in the red in 2013.

While the ETF is up in the past week, one of the worst year-to-date small-cap offenders, international or otherwise, is the Market Vectors India Small-Cap ETF (NYSE:SCIF). That fund has plunged 5.5 percent since the start of the year.

Emerging markets small-cap ETFs, as is the case with their U.S. counterparts, are often heavy on financial services names and other high-beta sectors such as consumer discretionary and materials.

One day might not make a trend. Perhaps five days does not, either, but it is clear some small-cap ETFs are showing signs of a looming pullback. The adventure among us can profit/hedge with short-term positions in the ProShares UltraPro Short Russell2000 (NYSE:SRTY) or the Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA). Both products are designed to deliver three times the daily inverse performance of the Russell 2000 Index.

For more on ETFs, click here.