Small Stocks Post Big Gains, What’s Next?
Ron DeLegge, Editor
October 8, 2009

SAN DIEGO (ETFguide.com) – The final quarter of 2009 has arrived and the more things change, the more they stay the same. As they’ve done for most of the year, small stocks are outperforming large stocks.

Small stocks are generally classified as companies with market sizes between $250 million up to $3 billion. Most of these companies are concentrated in industry sectors like consumer services, healthcare and technology. 

Large stocks are desirable for their stability and dividends, whereas small stocks are best known for their awesome growth potential.

In the context of your investments, large and small stocks complement each other. Used in conjunction with each other they can help you to achieve better long-term results with lower risk and broader diversification.

Let’s analyze a few small cap ETFs that invest in small company stocks.

iShares S&P SmallCap 600 Index Fund (NYSEArca: IJR)
Many people have heard or read about the S&P 500 (NYSEArca: SPY), but too few about the S&P SmallCap 600. While the former is used as a popular measurement of U.S. stocks, it omits small companies. Owning a small cap ETF like IJR is the obvious solution to filling any missing gaps in portfolio exposure. The market cap or size of companies within the S&P SmallCap 600 is generally between $300 million up to a ceiling of $2 billion.

So far this year, IJR has climbed by 19.81%.

SPDR Dow Jones Small Cap ETF (NYSEArca: DSC)
DSC follows the Dow Jones U.S. Small Cap Total Stock Market Index. Even though Dow Jones has eliminated this particular fund’s former name (DJ Wilshire Small Cap Index), its strategy remains unchanged. The index represents the small cap portion of the Dow Jones U.S. Total Stock Market Index. Components are ranked from 751-2500 by full market capitalization. The index is float-adjusted market capitalization weighted and additions to the index are made once a year in June.

In 2008, DSC declined by 37.47% but so far this year it’s risen nicely by 34.44%. DSC’s annual expense ratio is 0.25%.

Vanguard Extended Market ETF (NYSEArca: VXF)
This particular Vanguard ETF shadows the S&P Completion Index (SPCMI). The SPCMI is a subset of the S&P Total Market Index of approximately 4,500 companies, less S&P 500 stocks. Companies are removed from the index as they are placed into the S&P 500.VXF holds approximately 3,200 of the roughly 4,000 companies in the SPCMI. The annual expense ratio for VXF is 0.15%.

So far this year, VXF has risen by a handsome 30.69%.

Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEArca: VSS)
This Vanguard ETF debuted in April and it contains approximately 2,100 small company stocks from around the world. VSS competes with the SPDR S&P International ETF (NYSEArca: GWX), which has around $509 million in assets. GWX follows an index of 4,000 small cap stocks domiciled outside of the U.S. and charges annual expenses of 0.60%. GWX only contains market exposure to small caps in developed countries, whereas VSS covers small caps in both developed and emerging markets.

According to the prospectus, the VSS’ annual expense ratio is 0.38%.

Conclusion
The outperformance of smaller stocks is very telling about today’s market environment. Small stocks represent one of the riskiest segments of the equity universe, yet investors don’t seem to be fazed. Last year’s mentality of capital protection is a distant memory.

While no one knows if small stocks will continue to lead the rest of the market higher, there’s more than a few Wall Street types that believe it will never end. “Allow me to Introduce: The Biggest Sucker Rally since the Great Depression” takes a hard look at the entire market situation, including small stocks. I encourage you to read it.