Is The Timing Right For Small-Cap ETFs?

A weak market may not seem like an ideal investment environment, but small-cap stocks and exchange traded funds (ETFs) may thrive in these conditions.

During the last bear market, small-cap stocks skyrocketed and investors took in 22% a year over the next three  years, remarks Ryan McLimans for MSNBC. Small-caps have a long history of leading the way out of recessions, actually starting their uptrends in the middle of a bear market, rather than after a turnaround. Their small size owes a lot to this, because it makes them more nimble and better able to react to changing market conditions.

There are signs that irrational fear of further economic woes is dampening some small-caps. Yet, some companies have seen impressive net income growth over the last five years. For the unwavering optimists, keep in mind that these small companies could potentially become the next big name brands of tomorrow.

Small-caps tend to be more volatile in the short run. Smaller firms also face more business risks. It is important to be cautious about the “story” or money-making “potential” of small-caps.

This is why using ETFs to gain small-cap exposure is ideal - the provider has done the legwork for you in terms of research on various companies to ensure high quality ones are in the index, and your small-cap risk exposure is lower than it would be with single stocks.

• iShares S&P SmallCap 600 Index (IJR): up 15.4% year-to-date

• Vanguard Small Cap Value ETF (VBR): up 20.9% year-to-date

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