Why Small-Cap ETFs May Indicate Economic Recovery

Small-cap stocks and the exchange traded funds (ETFs) that track them have been surging on worries that the banking sector is still unstable.

These stocks, which carry a market capitalization of anywhere between $300 million and $2 billion, are among the most volatile and illiquid investments out there, but they are also the most heavily tied to banks and the overall economy. After the market meltdown of the previous year, it appears that investors are starting to diversify and educate themselves, gaining exposure to a broad range of small-caps and not relying on just one small-cap sector, states Geoffrey Rogow of The Wall Street Journal.

This has lead to an overall stellar performance by the small-caps. The Russell 2000 index of small-cap stocks is up about 17.6% and the Standard & Poor’s Small Cap 600 has jumped about 10.6% over the past month.  This could be a good indicator that our economy is in the early stages of a recovery.  After all, history suggests that small-caps lead the gains in the inital movement of stocks at the beginning of nearly every economic recovery. But since little about this market has been “typical,” it’s best to wait for the trend lines to show themselves first.

This surge and attractivness in the small-cap industry has even encouraged some ETF providers, such as Vanguard, to launch new products.  If you want to grab exposure to the market through ETFs take a look at the following:

• Vanguard Small Cap Value ETF (VBR): up 20.8% over the last month; down 6.3% year to date

• PowerShares Dynamic Small Cap (PJM): up 16.3% over the last month; down 8.7% year to date.

• iShares Russell 2000 (IWM): up 17.6% over the last month; down 4.5% year to date

Kevin Grewal contributed to this article.