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Small Cap ETFs
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About Small Cap ETFs |
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Small Cap ETFs Overview and forecast
These are a mix of small and mid cap ETFs, as a class, and their performance has elements of weather reports, built in to index moves and a generally predictable pattern of market moves. The Small Cap ETFs are on the whole not great traders, but have apparently been getting some interest lately as their prices ranges, in common with most ETFs, bottomed and some obvious value appeared in their prices.
Despite this breathless conformity, some of those moves have been pretty respectable, in terms of the first two quarters of 2009. As you can see from our chart, the Small Cap ETFs as a class have been performing reasonably well.
Small Cap ETFs Individually, they're a diverse group, and they operate across a range of markets, which adds some strategic appeal for major investors.
Their models and methods are well within the normal ETF approach, in most cases. Trading has picked up, like other ETFs, since the crash, and the forced remodeling of unit prices hasn't done the people who bought in at the bottom much damage. There has been real value in the Small Cap ETFs as traders in this period, and the margins deserve a look.
Short term (6 months)
An example is in order here, to illustrate what's becoming a pattern among the ETFs. Vanguard Small Cap ETF (VB) is a case in point. As you can see from our chart, it bottomed at around $30 in January 2009, and went up to $46 in May. If you were told you were getting paid $16 a unit to watch paint dry for 5 months, you could probably talk yourself into doing that, particularly if you had a few million units.
What's interesting is that these things went up quite strongly, in a much shorter term. This is a potentially good hunting ground for traders, because they put on a hefty percentage of that $16 a unit in a month or two. A bit of patience would have paid off very well in either scenario. VB is also interesting because unlike many of its class, it has over a billion in assets, and it's a good volume trader. This seems to be the model for ETFs which are getting the market's interest and putting value into the short term.
Medium term (2 years)
This article isn't intended to be a commercial for VB, but in the medium term there's one aspect of this ETF which should interest professional investors greatly: The weighting of the holdings. Weightings are at figures like 0.26% in their Top Ten Holdings. This may look obsessive, but in dealing with this class of asset, even where there are percentile emphases in sectors, it's a good, safe, strategy. It's not likely to spring a leak unless the whole sector gets hit, and reduces exposure to purely local nuisance events with individual holdings.
The Small Cap ETFs operate in a class of holding which can be highly remunerative, but it's also a nitpicking, bitsy, sort of asset class. The market can savage these companies, quite easily. You make a point of keeping the eggs in separate baskets, even if you have to go get a lot of baskets. It makes them a demanding mix, and quite a bit of care is required. That seems to be paying off in the recent market environment. Medium term, the Small Cap ETFs do have some good and interesting points.
Long term (5 years)
In the case of the Small Cap ETFs, you'd have to hope past performance isn't an indicator. The obituary for the original models would read, Corrected by market forces. The bull market wasn't too fascinated, and it ditched the Small Cap ETFs in a slow long drawn out process of price attrition. The charts aren't pleasant reading.
Their rebirth as more active traders has yet again for a class of ETFs signaled that they have good volumes and margins downscale, rather than up. As large, ponderous, perhaps pompous, sedate zeppelins of investment, they were pretty lousy. As realistic unit volumes, they're doing well. The long term future of the Small Cap ETFs is looking very much like the current model, for healthy investment.
Qualifiers to projections
Anyone living in a cave would advise investors not to go nuts over any one class of investment. The Small Cap ETFs have finally come out of whichever forest they were lost in, and are showing useful signs to traders and investors of potentials which they were previously giving no indication of ever achieving. They're getting interesting, and they're making money for someone, for sure.
That said, investor should note that Small Caps are nothing like the major indices. It's quite impossible to overstate the degree of difference from main index portfolios. VB's obvious efforts to produce a bullet proof asset mix is a good indicator of risk management.
The Small Cap corporations can turn into listed IEDs, particularly in a tricky economic environment, where their performance, rightly, is the only measure the market trusts. The market also regularly tears to pieces or over inflates the stock prices of underperforming Small Caps. The occasionally fashionable stocks are always risky, and distort underlying values.
Investors need to research, analyze spreads, and look for credible values, before doing anything. You can watch the paint dry at $16 a unit, sure, but there has to be something to put the paint on. Substance is the key.
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Last Updated on: 2010-01-14 02:03:40 |
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