There has been a recent shift in investor sentiment from small cap and international stocks to defensive large cap stocks. A drop in the GDP growth rate from 5.6% in the first quarter of 2006 to 2.5% in the second quarter and an inverted yield curve that is much more significant that the inversion that occurred earlier this year is leading some market observers to believe we may continue to see a slowdown in the economy through the second half of 2006. Another reason for this move from small cap stocks, which have performed exceedingly well over the last three years, has to do with the fact that despite five years of earnings growth, the blue chips have not seen a whole lot of price appreciation as this chart illustrates in vivid detail.

Not surprisingly according to the latest edition of the Hulbert Financial Digest, which tracks the performance of investment newsletter editors, the most popular stocks amongst newsletter editors through July 31^st, 2006 are Johnson & Johnson (JNJ), Microsoft (MSFT) and Pfizer (PFE).

With this perspective in mind, lets take a look at two interesting ETFs that were introduced a little less than a year ago and track micro cap stocks. PowerShares Zacks Micro Cap ETF (PZI) and iShares Russell Microcap Index (IWC) provide a good alternative to investing in volatile individual microcap stocks and for the first 8 months outperformed the Dow. However over the last four months, these ETFs have given up most of their gains to end up back where they started last year. This trend is likely to continue during the coming months and large cap value ETFs like the Dow Diamonds (DIA) are getting their shine back.

"Asif Suria is a guest author at ETFtrends and the editor of an investment newsletter called SINLetter. The author of this article is not a registered financial advisor and does not give investment advice. This article does not comprise any solicitation to buy or sell securities, ETFs or other investment vehicles".

Tags: Micro-Cap