Small-Cap ETFs: Recovery Leaders or Laggards?

Small-caps seized spotlight in 2009. But will this asset class and its related exchange traded funds (ETFs) keep the good times rolling on into the new year?Small-caps had a nice 2009: The Russell 2000 Index, gained 28.7% through Dec. 24 after declining 34.8% in 2008, and the S&P Small Cap 600 index, rose 25.6% after dropping 32% in the preceding year.

David Bogoslaw for BusinessWeek explains that the Fed’s anticipated withdrawal of some of the massive liquidity it pumped into a crisis-ridden financial system suggest that small-cap stocks won’t perform as well as larger ones in the year ahead. [What makes up a small-cap and micro-cap share and ETF?]

Bear in mind, though, that the recovery is not firm yet. We’re in for a long slog, many analysts believe. Although banks seem to be doing better, Main Street is still ailing: job growth is not positive yet, and unemployment numbers remain at two-decade highs. A recovery environment historically favors small-caps. [International small-cap ETFs have enjoyed a rally.]

Small-caps won’t always be in favor, though, so watch the trend lines and have your stop losses in place. [How to follow the trends.]

The new year is going to be a test for all companies, as investors watch for the ones that can meet their sales and profit forecasts but also start providing guidance again for future earnings.

For more stories about asset class ETFs, visit our asset class category.

• Vanguard Small-Cap ETF (NYSEArca: VB): up 38.3% year-to-date

• PowerShares FTSE/NASDAQ Small-Cap (NYSEArca:PQSC): up 34.8% year-to-date

• iShares Russell 2000 Index Fund (NYSEArca: IWM): up 29.9% year-to-date