On above average volume, the iShares Russell 200o ETF (NYSEArca: IWM) gained almost 1% Thursday to race to a fresh all-time high. The rub is that small-caps, which usually trade at higher valuations than their mid- and large-cap counterparts, are getting a tad rich in the valuation department.
When the Russell 2000 Index gets to 1,100, it will be trading at a price-to-earnings ratio of just above 18 for its 2013 forecasts, well above the long-term average of 14.9, reports Alexandra Scaggs for the Wall Street Journal, citing Bank of America Merrill Lynch.
BofA Merrill Lynch also noted most small-cap sectors, technology being the exception, are trading at valuations above their long-term averages. The bank pointed out that consumer discretionary and staples small-caps look pricey, the Journal reported.
The PowerShares S&P SmallCap Consumer Discretionary Portfolio (NasdaqGS: PSCD) and the PowerShares S&P SmallCap Consumer Staples Portfolio (NasdaqGS: PSCC) have an average P/E of 21.5, according to PoweShares data.
Only the PowerShares S&P SmallCap Utilities Portfolio (NasdaqGS: PSCU) has a P/E of 19 among the nine PowerShares small-cap sector ETFs.
On the other hand, investors have been rewarded, to this point, by paying up for performance. IWM is up nearly 31% this year, but that PSCC is up nearly 39% while PSCD is up 35%. The Power Shares S&P SmallCap Energy Portfolio (NasdaqGS: PSCE) is up almost 44.5% this year. [Small-Cap ETFs Pack a Big Punch]
The PowerShares DWA SmallCap Momentum Portfolio (NYSEArca: DWAS), this year’s best broad market small-cap ETF, has also rewarded investors willing to embrace pricey stocks. DWAS hit a new all-time high Thursday on roughly two and a half times the average daily volume.
The ETF’s methodology, which centers around identifying 200 small-caps with robust relative strength, may blur the line between active and passive management, but that does not discount the fact DWAS has surged 37.2%. The largest sector weight in DWAS is almost 29% to health care and health care small-caps also trade at valuations above what is found on the Russell 2000 Index. [Soaring Small-Cap ETF Changes up a Bit]
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of IWM.