Smaller Stocks Hang Tough
July 23, 2008

SAN DIEGO (ETFguide.com) – This year, while there haven’t been many havens for stock investors, two areas holding their own are mid and small company stocks.

Exchange-traded funds (ETFs) following mid and small cap stocks have held up better compared to their larger counterparts. The MidCap SPDRs (Ticker: MDY) is down just 4.6 percent and the iShares S&P SmallCap 600 Index Fund (Ticker: IJR) is off by 4.9 percent. In contrast, the SPDRs S&P 500 ETF (Ticker: SPY) has declined by 12.8 percent.*

Mid cap indexes are generally comprised of companies with market capitalization sizes between $2 to $10 billion. Small cap indexes are even tinier, with market sizes of stocks that usually fall between $250 million to $2 billion.

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A company’s market capitalization is determined by multiplying the number of shares outstanding by one share of a company’s stock price.

Do you own smaller company stocks?

If your portfolio is badly underperforming so far this year, there’s a good chance it’s because you don’t have market exposure to mid and small cap stocks. By owning a diversified index ETF you can easily plug any missing holes in your portfolio. It will also save you the trouble of researching and selecting individual stocks.

What about cost?

ETFs that follow true market indexes in the mid and small cap categories generally charge annual expenses from 0.10 to 0.25 percent. Compared to actively managed mutual funds, this is a huge cost advantage that favors you, the investor. Why bear the burdensome cost of paying for portfolio managers that most of the time underperform the indexes?

Some of the top holdings within the MidCap SPDRs include Arch Coal, Pioneer Natural Resources, and Southwestern Energy. Financials (15.36%), business services (11.13%) and energy (12.03%) account for the largest industry sector representations. 

Top holdings within the iShares S&P Small Cap 600 Index Fund are Ansys, Atwood Oceanics, and Helix Energy Solutions. Industrial Materials (16.62%), financials (15.4%) and energy (12.02%) make up the bulk of sector representation.

Another easy way to own mid and small company stocks is through a total market index fund like the Vanguard Total Stock Market ETF (Ticker: VTI), SPDR DJ Wilshire Total Market (Ticker: TMW), or the iShares Russell 3000 Index Fund (Ticker: IWV).

Each of these ETFs follow indexes that attempt the replicate the performance of the total U.S. stock market. By design, they include stocks of all market sizes.

*All performance figures YTD through July 22, 2008 market close