Small-cap stocks and exchange traded funds (ETFs) have historically led market recoveries. This time around seems no different: many analysts predict that small-caps are going to be “ones to watch” as the United States dusts itself off.

Louis Basenese for Investment U has these reasons why small-caps will once again lead the markets back to health this year:

  • On average, small-caps outperform their large-cap neighbors 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. [Are small caps really the recovery leaders?]
  • 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.

Basenese also points out that low-quality stocks – those that suffered the worst beating during the recession – rally first and the most. True to form, financials led the way off the March 9 bottom, rallying an average of 130%.

Get broad exposure to small-caps using ETFs. By doing so, you’ll not only get a wide range of exposure to top companies, but the legwork and research will have been done for you. [Why international small caps may be the ticket.]

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

  • Vanguard Small-Cap ETF (NYSEArca: VB)

  • PowerShares FTSE/NASDAQ Small-Cap (NYSEArca:PQSC)

  • iShares Russell 2000 Index Fund (NYSEArca: IWM)

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.