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Best ETFs in Small-Cap, Mid-Cap Space

Second-Half Outlook

"If you believe the credit crisis is not over, small-caps would be a better place to hide than large-caps," McClatchy said. "The market has been so fixated on weakness in the financial sector and on commodities that attention has been driven away from the difference between these asset classes."

There are some obstacles that will likely remain in the way for both small-caps and large-caps.

"Valuations seem to be improving, but sentiment does not," said Robert Maltbie, Managing Director of Singular Research, an independent research firm that focuses on small-cap companies. "It has been a fairly garden variety bear market and we are probably only about half way through it. There has been a continued economic slowdown from higher oil prices."

Maltbie notes that small-cap companies with a global reach have been holding their ground, but current market conditions might play into the hands of investors who choose to go with individual stock picking as opposed to ETFs. "We are finding companies with exposure to emerging markets are working," Maltbie said. "It is a real stock picker's market right now though."

Maltbie looks for names that beat their estimates by sizable margins. Two small-cap names on his radar right now are Graham (GHM) and Balchem (BCPC).

Graham is a manufacturing company that has seen strong growth in the sale of its vacuum and heat transfer equipment. "Its growth is more of a secular trend than a cyclical trend," Maltbie said.

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