Is A Small-Cap Stock and ETF Rally Set Up?

•If history is to repeat itself, is there a small-cap stock and exchange traded fund (ETF) rally on the horizon?

Outperformance by small-cap stocks has generally followed market bottoms of recessions, so says Merrill Lynch. But first we have to figure out if we are even in a recession. Despite this, some investors have already begun placing their bets on stocks of smaller companies, reports Norm Alster for The New York Times.

During the second quarter, small-cap stocks lost 1.6% on average compared to the S&P 500 losing 3.2%, or 4.0% for large-cap value funds. The major weight on small-caps will be the financial sector, which could drag down the performance, as most of the stocks are not cheaply priced.

In an economic recovery, small-caps tend to perform best because they’re nimble and quicker to act when the market conditions are favorable.

Small-cap technology and health-care companies are the main contenders for the small-cap growth stocks that are looking like a better buy than value, according to one strategist. ETFs within the small-cap realm:

• iShares S&P SmallCap 600 Index Fund (IJR), down 9.9% year-to-date
• iShares Russell 2000 Index Fund (IWM), down 10.9% year-to-date
• Vanguard SmallCap (VB), down 11.1% year-to-date