If history is to repeat itself, is there a small-cap stock and exchange traded fund (ETF) rally on the horizon?

Outperformance by small-cap stocks has generally followed market bottoms of recessions, so says Merrill Lynch. But first we have to figure out if we are even in a recession. Despite this, some investors have already begun placing their bets on stocks of smaller companies, reports Norm Alster for The New York Times.

During the second quarter, small-cap stocks lost 1.6% on average compared to the S&P 500 losing 3.2%, or 4.0% for large-cap value funds. The major weight on small-caps will be the financial sector, which could drag down the performance, as most of the stocks are not cheaply priced.

In an economic recovery, small-caps tend to perform best because they’re nimble and quicker to act when the market conditions are favorable.

Small-cap technology and health-care companies are the main contenders for the small-cap growth stocks that are looking like a better buy than value, according to one strategist. ETFs within the small-cap realm:

  • iShares S&P SmallCap 600 Index Fund (IJR), down 9.9% year-to-date
  • iShares Russell 2000 Index Fund (IWM), down 10.9% year-to-date
  • Vanguard SmallCap (VB), down 11.1% year-to-date

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.