Amid plenty of challenges, the third quarter was still a decent one for U.S. stocks. The S&P 500 gained about 4.7% while the S&P 500 Equal-Weight Index was even better with a gain of 6.2%. Those are not bad numbers, but some ETFs that are considered “market-based” funds trounced the benchmark U.S. index in the third quarter. For some, last quarter’s performances kept with trends that have been ongoing since the start of the year.
The out-performance of traditional benchmarks by market-based in the third quarter was particularly pronounced in the small-cap arena. The iShares Russell 2000 ETF (NYSEArca: IWM) gained an impressive 8.2%, but that paled in comparison to the returns offered by more focused rival ETFs. [Small-Caps ETFs Power Stocks to Record Highs]
In the second quarter “Small Caps effectively doubled the return of their Large Cap counterparts, showing that this performance trend is quite healthy. This quarter we did see that relationship hit a new all-time extreme as Small Caps continue to exploit the market environment and attract new investments at a faster rate than large caps,” according to Dorsey Wright & Associates.
Among the small-cap ETFs that outpaced IWM last quarter was the PowerShares DWA SmallCap Momentum Portfolio (NYSEArca: DWAS), which gained 13.3% last quarter.
DWAS tracks an index maintained by Dorsey, Wright & Associates designed to identify companies that demonstrate powerful relative strength characteristics. The benchmark is comprised of about 200 companies selected from a small-cap universe of approximately 2,000 of the smallest U.S. companies [New Small-Cap ETF Smokes Russell 2000]
“As we have seen in other asset classes, the relative strength return factor has enjoyed a market environment conducive to good outcomes, and so far DWAS has provided just that to its investors in 2013,” according to Dorsey Wright.
Other small-cap ETFs that also outpaced IWM last quarter include the iShares Russell 2000 Growth ETF (NYSEArca: IWO) and the iShares S&P Small-Cap 600 Growth ETF (NYSEArca: IJT). That pair gained an average of 12%.
The revenue-weighted RevenueShares Small Cap (NYSEArca: RWJ) delivered a third-quarter gain of 11.7% while the SPDR S&P 600 Small Cap Growth ETF (NYSEArca: SLYG) returned 11.2%. The iShares Russell Microcap ETF (NYSEArca: IWC) added 11%.
“For now, the dominant trend remains Small Caps over Large Caps, and while both are generally rising, we continue to steer toward the smaller of US companies where possible,” said Dorsey Wright.
Investors have taken note of the potency of DWAS. Of the ETF’s $428.2 million in assets under management, over $375 million has come into the fund since the start of this year.
PowerShares DWA SmallCap Momentum Portfolio
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of IWC and IWM.