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Small Cap ETFs to Consider

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The last 10 years have been great -- if you were in small caps and some other asset classes.

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MINYANVILLE ORIGINAL There really is a bull market somewhere, maybe all the time. It's been widely reported that the stock market has gone nowhere for 10 years, and that is only partly true, depending on what part of the market you are referring to. That the market has been stuck for the past 10 years is true for many of the big, mature company indexes. Some other parts of the market have done fine. Small caps, for instance, have been in a bull market for the last 10 years.

The iShares S&P SmallCap 600 Index ETF (NYSEARCA:IJR) which replicates the S&P Small-Cap 600 Index (INDEXSP:SP600) has gone up about 140% from May 2000 to Sept 2012, which is a gain of over 10% a year. Also SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) which replicates the S&P Mid-Cap 400 Index (INDEXSP:SP400), has gone up about 8% a year in those same dates, an accumulated return of about 100% . If you were in those asset classes, the last 10 years would not have been a lost decade. The S&P 500 Index (INDEXSP:.INX) in that same period, along with the Nasdaq (INDEXNASDAQ:.IXIC) and many other larger-cap indexes, was essentially flat. (Data is sourced from Yahoo Finance.com.)

As well, there are sectors that have done very well over the past 10 years. One of these is the energy sector. The Energy Select Sector SPDR ETF (NYSEARCA:XLE) has gone up over 200% from December 1998 to September 2012. No bear market there, although there were wide swings in that period.

Some sectors have done worse, some much worse, than the S&P 500 Index. One is the financial sector. In the same period that XLE has performed so well, the Financial Select Sector SPDR (NYSEARCA:XLF) has declined about 50%.

Small caps over long periods of time have and probably will continue to outperform bigger cap-sized equities. Small-caps do have periods of substantial decline, and have higher volatility than big- and mid-caps. Keep in mind that parsing the market in this way -- by selecting cap sizes, sectors, regions, and other slices of the market -- is not investing in the overall market, which is dominated by bigger companies and more developed economies. Bigger companies comprise most of the market's capitalization. Of course, investors don't think about being in the "market"; they care about making money. Not investing in the "safer" confines of the bigger-cap companies entails taking on more risk, although by staying safe and not slicing and dicing the market for beta, you might be giving up opportunity.

I think choosing asset classes for more beta makes sense, and safety is relative in the market. And market timing, as far as when to be in certain asset classes, trumps any other strategy. Small caps should be a part of almost any portfolio. The US economy is doing better than much of the rest of the world today, and small caps are tied more to the domestic economy than are big caps, making them a timely buy.
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My clients and/or I am long DEM, DGS, EEM, IJR, RWJ
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