Small-Cap ETFs Show Mettle By Comparison

The small-cap exchange traded fund (ETF) as an asset class has had a successful decade, while proving that the little guy can come out on top in any climate.

No asset class has been spared in this bear market, but over the long-term, small-cap funds have performed slightly better than their mid- and large-cap brethren. One typically expects small-caps to get pummeled, since they have less diversified revenue resources, are not as globally diversified and have a harder time generating capital, explains Kyle Waller for Seeking Alpha.

Performance has not been consistent, however, as three different ETFs from the same asset class vary widely:

• iShares S&P Small Cap 600 Index (IJR): down 33.7% year-to-date; 19.1% financials; 16.9% industrial materials

• Vanguard Small Cap (VB): down 38.4% year-to-date; 17.3% financials; 16.2% industrial materials

• iShares Russell 2000 Index (IWM): down 35.7% year-to-date; 21.6% financials; 14.5% industrial materials

All three funds are constructed and weighted differently; companies in IJR have to be trading at least 12 months, with four straight profitable quarters and be tested for liquidity before inclusion. VB and IWM have a more passive index methodology approach.

While small-caps haven’t been spared in the turmoil, we expect them to bounce back from a downturn better than most because their small size makes them more nimble and resilient in a market recovery.