Small-cap value stocks and exchange traded funds (ETFs) have been benefiting from having less to lose than large-caps and so far this year, they’ve been outpacing them handily.

In the last month, small-cap value ETFs are up 5.4%, while large-cap values are up 3.2%. Mid-caps are up 3.8%.

Trang Ho for Investors Business Daily reports that unlike the large-caps, small-cap ETFs did not own financials, which have been battered in the early part of this year. Small-caps have the best long-term and intermediate prospects, because in a volatile market growth stocks are at a risk to lose value.

Last year, large-caps were the story after a series of strong earnings reports. But as the subprime crisis spread, ETFs that hold them took a beating.

One expert says the ideal companies are those that are undiscovered or unloved, with strong balance sheets and cash flow, consistent management, increasing or stable market share and margin expansion potential. ETFs that hold these types of companies:

  • iShares S&P SmallCap 600 Value Index (IJS)
  • Vanguard Small Cap Value (VBR)
  • PowerShares Dynamic Small Cap Value (PWY)

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.