The outperformance of smaller and lower-quality stocks is typical in the first year of a bull market, and as the global economy struggles to rid itself out of this recession, this trend could remain in place. John Spence for MarketWatch reports that small-caps tend to beat large caps as cyclical sectors outperform defensive ones. [Next Up: Small-Cap Sector ETFs.]

No one can say whether the rally will continue, or for how long, but you can’t ignore numbers like these:

• In last three months, small-caps are up about 13% while large-caps are up about 4%
• In the last six months, small caps are up about 15% and large caps are up about 10%

Consider this about small-caps, too: the largest companies in the United States today – the Googles, the Microsofts, the Home Depots – they all had to start somewhere. They were once small, and they got big. You never quite know who will be the next large-cap, though, so check out ETFs for broad exposure to the top small stocks and play them all. [The Case for Small-Caps in 2010.]

For more stories about small caps, visit our small cap category.

• Schwab U.S. Small-Cap (NYSEArca: SCHA)

• iShares Russell 2000 Index (NYSEArca: IWM)

• iShares Russell Microcap Index (NYSEArca: IWC)

• PowerShares Zacks Micro Cap (NYSEArca: PZI)
  

SDPR S&P 500 (NYSEArca: SPY). SPY is one of the go-to ETFs for exposure to the broader market. No wonder: the S&P 500 is the index that is most watched by professional traders because the large-cap index is considered one of the broadest measures of the state of the U.S. economy. [Indexes ETF Investors Should Know.]

Financial Select Sector SPDR (NYSEArca: XLF). XLF holds some of the biggest banks in the country, but they’re under fire these days. Senate Banking Committee Chairman Christopher Dodd is expected to unveil legislation that will be even tougher on the financial industry than President Barack Obama’s original plan. Dodd’s bill will allow the Federal Reserve to examine any bank holding company with assets in excess of $50 billion. Large financial companies that aren’t banks could also fall under scrutiny under the plan. [6 ETFs to Play the Financial Recovery.]

PowerShares QQQ (NASDAQ: QQQQ). Technology is leading the way out of the recession. Dr. Ed Yardeni of Yardeni Research says that tech will come out ahead this year and “industry analysts are raising both their 2010 and 2011 estimates as the sector continues to deliver more positive earnings surprises than the other sectors.” The tech sector’s top performers have some things in common, such as companies that have big global footprints and strong, clean balance sheets. Additionally, valuations look attractive, tech companies are continuing to put up record revenue numbers and capital expenditure may begin to increase. [Why Tech ETFs May Keep Leading in 2010.]

iShares MSCI Emerging Markets (NYSEArca: EEM). The man who coined the term “emerging markets,” Antoine van Agtmael, chief investment officer at Emerging Markets Management, says emerging market shares could waver in a 20% up or down range this year. It won’t be the sell-off of 2008, but it may not be the bonanza seen in 2009. Emerging markets still have value and although the returns may not be what they had been, you can’t fight the trend. [Emerging Market ETFs: A Temporary Pause?]

iShares Russell 2000 Index Fund (NYSEArca: IWM). On average, small-caps outperform their large-cap brethren for a full three years coming out of a recession, according to Morningstar. Coming off particularly nasty slowdowns, small-caps boast even more endurance. For example, after the 1973-1974 recession, small-caps trounced large-caps for an entire decade, returning an average of 28% per year. Furthermore, the small size of these shares make them nimble and better equipped to withstand an economy’s ups and downs. Small-caps have a historical tendency to outperform because they’re better able to adapt to shifting market conditions. [The Case for Small-Cap ETFs.]

United States Natural Gas (NYSEArca: UNG). President Barack Obama is unveiling a proposal for coal-burning power plants to switch to natural gas. That’s because natural gas is cleaner, and the United States has got it in spades. Big oil might like the proposal, too, as many companies have made significant investments into natural gas. [Obama's Proposal Could Be a Win for Natural Gas ETFs.]

iShares Dow Jones U.S. Real Estate (NYSEArca: IYR). At the very least, real estate’s comeback from the lows is impressive. Investors had priced in total financial ruin that never materialized; that’s the good thing. But now the market may have gone too far in the other direction; there are concerns that it has “overshot” and calls for a strong recovery are way too hopeful at this point. Worse yet, if a double-dip recession strikes, real estate stocks could be among the hardest-hit. [Real Estate ETFs: Big Improvements, Big Challenges.]

iShares MSCI Japan (NYSEArca: EWJ). Joblessness in Japan is dropping and jobs availability is o the rise. It’s taken as a sign that improving exports and output are fueling the necessary economic growth. But don’t get too excited; analysts still feel that, as in most developed markets, a recovery in Japan will be slow. [3 Things Japan ETF Needs Now.]

iShares FTSE/Xinhua China 25 (NYSEArca: FXI). The Chinese government also has a vested interest in building and maintaining the country’s infrastructure: when there are roads, runways, electric power, clean water and more, social unrest declines. Meanwhile, the country still struggles with concerns over an asset bubble and is taking steps to mitigate these issues. China’s government warned that China’s asset prices could fluctuate dramatically if global stimulus policies are reduced. [China ETF Plays.]

Energy Select Sector SPDR (NYSEArca: XLE). Energy is a major component of daily life around the world. If futures-based energy ETFs aren’t for you, perhaps an equities ETF such as this one might be a better bet. Wild price swings in oil, natural gas and gasoline may take awhile to become evident in these funds, making them slightly less volatile. The oil industry is expanding its options into other energy fields as it anticipates the eventual depletion of oil reserves. [How to Harness Energy by Using ETFs.]

For full disclosure, Tom Lydon’s clients own shares of UNG and QQQQ.

Max Chen contributed to this article.

Trend 1: Small Caps Kicking You-Know-What

Small-cap ETFs are dusting large caps. The primary reason? History. In recovery periods, small-caps tend to lead the way toward the light. They’re smaller and quicker to react to shifts in economic and market conditions. Large companies have lots of flag poles up which to run various matters and issues, leaving big changes in strategy to get caught in bureaucracy. In the last month, small-caps are up about 11%, vs. about 7% for large-caps and 8% for mid-caps. [The Case for Small-Caps in 2010.]

• Rydex S&P SmallCap 600 Pure Value (NYSEArca: RZV)
• WisdomTree SmallCap Dividend (NYSEArca: DES)
• iShares S&P SmallCap 600 Growth (NYSEArca: IJT)

Trend 2: What’s the Beef with Fixed Income?

Even we have sounded the alarm: fixed-income could get hit as the Federal Reserve hikes interest rates. And that’s still true. But right now, it’s copacetic; there’s been a lot of bark with no bite yet in sight. Yields continue to be appealing in certain areas, too. For example, the SPDR Barclays Capital High Yield Junk (NYSEArca: JNK) is yielding 12.2% right now. Long-term Treasuries will get beat in a higher interest rate environment, but short-term Treasuries and corporate bonds have been fine. Have an exit strategy in place if and when that changes, though. [8 ETFs That Can Add Income to Your Portfolio.]

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
• Vanguard Short-Term Bond (NYSEArca: BSV)
• SPDR Barclays Capital Short-Term Corporate Bond (NYSEArca: SCPB)

Trend 3: Base Metals Heat Up

The “shiny” metals are out; base metals are in. The stars seem to have aligned for a possible rally in base metals: China is growing, building and importing base metals faster than they can be used in new skyscrapers; other emerging markets are also building and importing metals; the auto market is slowly recovering, lending support for a rally in platinum and palladium and the U.S. housing market is recovering in fits and starts. All this building and recovery means more demand for copper, platinum, steel and other building blocks of construction at home and abroad. [Why Metals ETFs Are Leading the Charge.]

• PowerShares DB Base Metals (NYSEArca: DBB)
• iPath DJ-UBS Copper ETN (NYSEArca: JJC)
• ETFS Physical Platinum (NYSEArca: PPLT)

For more stories on spotting trends and acting on them, read our special report on trend following.

Dividends generally come in two incarnations: qualified and non-qualified. The qualified dividends are what most of us like, because they’re taxed at a lower rate – often 15% for the highest of earners. Non-qualified dividends are taxed at ordinary income rates, often a lot higher than 15%. [ETFs and Taxes: What You Should Know.]

It’s important to be aware of which kinds of dividends your ETF pays. Here are two examples:

• SPDR Dow Jones Industrial Average (NYSEArca: DIA) pays qualified dividends, because DIA primarily owns shares of U.S. dividend-paying companies.
• SPDRs (NYSEArca: SPY) pays both types of dividends; the non-qualified dividends exist because SPY owns some real estate investment trusts (REITs), which pay that type of dividend.

We’re not tax professionals, and this shouldn’t be construed as tax advice. Consult your own professional for guidance specific to your situation. [How Commodity ETFs Are Taxed.]

For more stories about dividend investing, visit our dividend category.

Direct foreign investment into Brazil’s economy is forecast to increase 47% this year, but many are beginning to broach the “B” word – Bubble. Brazil is going to host the World Cup in 2014, the Summer Olympics in 2016, the middle class is exploding and GDP has tripled since 2003. The country’s planning minister expects the economy to grow 6% this year. You can see what’s so appealing about Latin America’s largest country. [Our Guide to the BRICs.]

Last year, international investors added $11.4 billion to their stock holdings, the most since records began getting kept in 1994, says  Joshua M. Brown for The Faster Times. Many believe the money will keep coming beyond 2010, too. [Brazil ETF Shows Is Might.]

The thing about bubbles is that you never know for sure whether it is one until it pops. Whether Brazil is in a bubble or not, you can protect yourself by first learning to spot the signs of a bubble, then implementing a trading strategy that incorporates a stop loss. Ours is set at 8% – high enough that we’re not in and out frequently, low enough to have a limit on losses. By having a point at which you get out, you can participate in any potential long-term uptrend resting assured that your risk on the downside is capped. [How to Spot and Avoid Bubbles.]

For more stories about Brazil, visit our Brazil category.

• iShares MSCI Brazil (NYSEArca: EWZ)

• Market Vectors Brazil Small Cap (NYSEArca: BRF)

• WisdomTree Dreyfus Brazilian Real (NYSEArca: BZF)

China Premier Wen Jiabao took aim at Washington yesterday, criticizing efforts to increase exports through weakening the dollar as “trade protectionism.” He also said that the pressure being placed on China to allow the yuan to appreciate is counterproductive, and that he doesn’t consider the yuan is overvalued. WisdomTree Dreyfus Chinese Yuan (NYSEArca: CYB) is down slightly this morning. [Play the Yuan's Fortunes With These ETFs.]

The United States has been put on notice: its days of top-notch credit ratings are at serious risk of ending. Right now, the U.S. credit rating is Aaa and “stable,” but Moody’s said that its “distance-to-downgrade” has “substantially diminished.” The United States is not alone here; Britain, France, Spain, Germany and others are at risk of downgrades, too. SPDRs (NYSEArca: SPY) are down about 0.7% this morning.

A battle royale over financial reform is shaping up in Congress. Senate Banking Committee Chairman Christopher Dodd is expected to unveil legislation that will be even tougher on the financial industry than President Barack Obama’s original plan. Dodd’s bill will allow the Federal Reserve to examine any bank holding company with assets in excess of $50 billion. Large financial companies that aren’t banks could also fall under scrutiny under the plan. Financial Select Sector SPDR (NYSEArca: XLF) is down slightly today. [6 ETFs to Play the Financial Recovery.]

Industrial production rose last month by a scant 0.1%. Despite the small improvement, it’s worth rejoicing over because it beat expectations and it’s the eight straight monthly gain. Manufacturing was the index’s laggard, declining by 0.2%. Mining and utilities, on the other hand, gained 2% and 0.5%, respectively. Vanguard Industrials (NYSEArca: VIS) is down about 0.3% this morning.

The housing sector is highly cyclical and sensitive to economic and credit conditions. Homebuilding ETFs have rallied nicely in the last year, up more than 100% since the market’s March 9 low. That doesn’t mean, however, that they’re done struggling. It might continue to be a year of fits and starts for the sector as unemployment stays high and homeowners foreclose, but you can use ETFs to diversify and mitigate risk while you wait for that firm recovery. [How to Follow the Trends.]

Asset allocators might note that over the past three years SPDR S&P Homebuilders (NYSEArca: XHB) and iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB) have displayed 56% and 64% correlation to the S&P 500, reports John Gabriel for Morningstar. [Why Homebuilders Are Surging Ahead.]

For more stories about homebuilders, visit our homebuilders category.

• SPDR S&P Homebuilders (NYSEArca: XHB): Here, only about 35% of the fund’s assets (or eight out of the 26 holdings) are invested in homebuilders. The fund also invests in other sub-industries such as building products, home furnishings, home-improvement retail, and home-furnishing retail. This is an equal-weighted market cap index.

• iShares Dow Jones U.S. Home Construction Index Fund (NYSEArca: ITB): Only half of the fund’s constituents are actual homebuilders, but these companies account for about 70% of the portfolio. This is a market cap-weighted index that caps non-homebuilder related companies at 40%. [Big Improvements, Big Challenges In Real Estate.]

The always insightful Gary Gordon at ETF Expert has a few favorite income-producing ETFs, ranging from bonds to low-volatility funds holding preferred stocks and more. These are a few places where income can be found. As always, there are many more ETFs beyond what’s listed here. By using a screener, such as ETF Desk’s, you can narrow down the funds that pay the highest yield and find even more opportunities.

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

Low Volatility. He notes that funds like JP Morgan Alerian MLP (NYSEArca: AMJ) and PowerShares Financial Preferred (NYSEArca: PGF) have handsome yields. PGF’s yield right now, in fact, is 8.6%. iShares Dow Jones S&P U.S. Preferred Stock (NYSEArca: PFF) yields 5.9%.

Junk. While high-yield bond funds might mean higher risk, they often tend to pay among the most handsome yields around. iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) are currently yielding 9.6% and 12.2%, respectively.

Muni Bonds. Investors who don’t want to minimize their tax exposure may want to consider muni bonds, which are exempt from federal taxes; in some cases, they’re exempt from state and local taxes, as well. Powershares Insured Muni (NYSEArca: PZA) and Market Vectors High Yield Muni (NYSEArca: HYD) yield 4.8% and 6% respectively; that’s before you factor in the tax-equivalent yield, which varies depending on the tax rate.

Utilities. The utility sector is another famed for its income-production potential. PowerShares Dynamic Utilities Portfolio (NYSEArca: PUI) is yielding 4.98% right now.

There’s been a surge of new emerging market ETFs that give sector-specific pure plays, Jeff Benjamin for Investment News reports. The new indexes coming out now eschew the broad-market approach in favor of capitalizing on opportunities in sectors as they emerge. [Russia ETFs: An Emerging Illusion?]

While this approach is more aggressive and requires more due diligence on the underlying market drivers, the diversification benefits are outstanding. But be aware that while you may be getting more concentrated exposure and flexibility, the tradeoff is increased volatility and risk. [5 Reasons to Consider Brazil ETFs.]

If you’re salivating at the thought of emerging market exposure, but are wary of the risks, consider implementing a simple strategy with a stop-loss. One we suggest is the 200-day moving average with an 8% trailing stop loss. [How to Use a Trend Following Strategy.]

For more stories about emerging markets, visit our emerging markets category.

• Emerging Global Shares Dow Jones Emerging Markets Energy Titans (NYSEArca: EEO)

• Market Vectors Brazil Small Cap (NYSEArca: BRF)

Other newer sector-based funds include:

• Claymore/AlphaShares China Technology (NYSEArca: CQQQ)
  

• Global X China Consumer Fund (NYSEArca:CHIQ)

• Emerging Global Shares INDXX China Infrastructure Index Fund (NYSEArca: CHXX)

Claymore’s three new funds are:

• Wilshire 5000 Total Market Index (NYSEArca: WFVK): Tracks the Wilshire 5000, the only index that holds every single stock trading in the United States today. The expense ratio is 0.12%.
• Wilshire 4500 Completion Index (NYSEArca: WXSP): For investors who already have access to the S&P 500, this ETF gives exposure to the remainder of the market. The expense ratio is 0.18%.
• Wilshire U.S. Real Estate Investment Trust (NYSEArca: WREI): Tracks the Wilshire U.S. Real Estate Investment Rust Index, which launched in 1991. It provides pure exposure to the REIT marketplace and excludes other types of real estate securities. The expense ratio is 0.32%. [Homebuilders Surge Ahead.]

William Belden, Claymore’s managing director, says these new offerings help take Claymore’s product line in a new direction and expands on where the provider has already been. “We’re happy with what we’ve done, and we’ll continue to be opportunitistic,” but having more core offerings will help round out the product line and further appeal to advisors.

The indexes on which the ETFs are based are being called “pure and complete” – that is, indexes built to give pure exposure to various markets without artificial parameters in place.

Robert Waid, Wilshire’s managing director, said he sometimes refers to the Wilshire 5000 as a “third-generation” market index, following the Dow Jones Industrial Average and the S&P500. The index was born in 1974 after its creators looked at the S&P 500 and determined that a better measure of the market was needed.

To give a sense of how the technology has changed, in 1974 it took about 40 minutes to calculate the values of the securities in the index; today, it’s done in mere seconds.

The Wilshire 5000 is a cap-weighted index, meaning that the largest companies are weighted the heaviest. The only criteria a stock has to meet to be included in the index is to trade on a U.S. exchange. There are no cutoff points concerning size, trading volume or share value. There are no nods toward certain sectors, either. [More on Indexing Here.]

“We didn’t create these indexes to fit some marketing spiel or to be publicly traded; we created these indexes to serve as benchmarks” so people could see how they’re doing, as well as to get a sense of how the market is looking.

And 5000 may be in the name, but there aren’t necessarily 5000 stocks in the index. Waid says that when they were building the index in 1974, there were close to 5000 securities trading, so they rounded up and the name stuck as the number of stocks in the United States ballooned to 7,600 in 1998 and shrank down to 4,100 today. Companies are added monthly.

For more stories about new ETFs, visit our new ETF category.

Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.  Both Claymore and Rydex|SGIO are owned by Guggenheim Partners.