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Impressive Relative Strength for Smaller Stock ETFs

NEW YORK ( ETF Expert) --Last week, U.S. equities rocketed more than two percentage points on an enthusiastic embrace of potential progress in alleviating Europe's debt woes. Nevertheless, money managers and "mom-n-poppers" yanked $4.6 billion dollars from U.S. stock ETFs.

Fund flows may provide insight into what institutional investors are thinking. In this instance, some may be thinking about locking in a portion of their gains for 2012.

On the other hand, the fund flow data can be deceiving. For one thing, how significant is $4.6 billion when it may only represent 1% or 2% of the assets under management for domestic stock ETFs? Additionally, can anyone know with certainty whether the smart money or "stupid money" is exiting the door?

At the same time, there are equally confounding data points. For example, the net exodus form U.S. stock ETFs primarily came from large caps. However, the iShares S&P 400 Mid Cap Fund (IJH) and iShares Russell 2000 (IWM) witnessed impressive dollar inflows. The former raked in nearly $1 billion for 8.7% off its total asset base, while the latter collected a bit more than $500 million for 3.4% of its assets.

It is certainly conceivable that the market believes that worldwide central bank easing -- European Central Bank, Bank of England, People's Bank of China, U.S. Federal Reserve -- will be stepped up to revive the global economy. Indeed, small-caps and mid-caps tend to outperform their large-cap counterparts when there is an expectation of increasing demand and smaller company growth, not when participating investors fear that stimulus measures will fail.

Since ECB President Mario Draghi first uttered "whatever it takes" to protect the euro back on July 26, smaller stocks have rocketed ahead. In fact, their plight seems to have gotten lost in the Dow and Nasdaq hoopla.

In spite of the impressive run-up, the rally appears based more on fear of missing out on the upswing than on rationality. At the same time last week that Draghi unveiled a desire for buying unlimited sovereign debt with electronically printed euros, he also presented economic projections of deepening recession in the euro zone.

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