SPDR S&P 500 (NYSEArca: SPY) is the largest exchange traded fund (ETF) in the world. But if you’re only looking at funds that give exposure to large-caps, you may not be maximizing your potential.
In this market climate , investing solely in the biggest, most popular index funds might result in disappointing returns and/or missed opportunities.
Don’t get us wrong: the S&P 500 is the benchmark index, used by millions as a gauge of the health of the markets. The lesson here, though, is not to put all your eggs in one basket. Dan Caplinger for The Motley Fool recently made a similar point. [The Case For Large Cap ETFs.]
If you’re only looking at the largest companies when investing in ETFs, you may be missing out. At any given time, a number of asset classes and sectors come in and go out of favor.
These days, small- and mid-caps are living large. Just compare the S&P 500, which is up 11.8% year-to-date, to other funds such as PowerShares Dynamic Small Cap (NYSEArca: PJM), up 22%; iShares Russell Microcap (NYSEArca: IWC), up 25.9%; and Schwab U.S. Small-Cap (NYSEArca: SCHA).
Small-caps are in favor these days as we come out of a recession. Long-term, small caps tend to outperform large-caps. There’s simply no reason to be overweight large-caps these days.
The lesson here is not to pay attention to just one asset class at the exclusion of others. After all, if you’ve been ignoring small-caps and sticking with the big ones, you’ve sacrificed some performance.
It’s easy to spot these opportunities. We use a simple strategy of watching the trend lines, which you can read about in more detail and learn how to implement here. [Why A Simple ETF Strategy Is Best.]
For full disclosure, Tom Lydon’s clients own SCHA.
Tisha Guerrero contributed to this article.