Why Small Cap ETFs Are Lagging | ETF Trends

Coming out of recessions, small-caps have a tendency to outperform. So why are many small-cap exchange traded funds (ETFs) struggling to keep pace with the markets?

Small-caps have had a tough time keeping up with the big guys and the month of August revealed a struggle for this asset class. Year-to-date, iShares S&P Small Cap 600 (NYSEArca: IJR) is down 2.9%, while the S&P 500 is down 5.4%.

Apparently, loss of investor interest in small-cap companies — which S&P defines as companies with market caps of $1.5 billion or less — reflects reduced expectations for U.S. economic growth, says S&P’s Sam Stovall. Slower economic activity is becoming more of a reality and as economic trends such as the housing market and labor force are weak, the prospects for small-cap companies are waning. [What to Look for In Micro Caps.]

Josh Lipton for MinyanVille reports that small-cap companies actually do not look cheap. About an 82% market premium is seen in this asset class, vs. the typical 17%, says Stovall. Although this dip may be just a change in asset-class leadership, the general consensus is to stay defensive and have a strategy in place if you are invested in the related small-cap ETFs. [Why Small-Caps Were Outperforming.]

Visit our small-cap page for stories on these companies. Among the small-cap ETF available today include:

  • Schwab U.S. Small-Cap (NYSEArca: SCHA)
  • iShares Russell 2000 Index (NYSEArca: IWM)
  • iShares Russell Microcap Index (NYSEArca: IWC)

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.