The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- There's one issue that has been bothering me for quite some time. Why would investors eagerly pay 21 times forward earnings estimates for the
iShares Russell 2000
when they can pay roughly 14 times forward earnings estimates for the
S&P 500 SPDR Trust
Six months earlier, the forward price-to-earnings ratios had demonstrated a similar discrepancy. Yet the markets rewarded investors who chose to overweight IWM; the small-cap supercharger garnered 34% over the same half-year period that SPY amassed 24%.
In early September, though, the
had been rumored to initiate another round of quantitative easing (QE2). One could perhaps justify taking more risk with the Fed stimulus acting as a tailwind.
How about today -- with the Federal Reserve nearly finished with its Treasury purchasing program. Have we genuinely transitioned to a "self-sustaining economy?" Without the Fed purchasing treasuries, won't higher yields be harder on smaller businesses than on larger ones?
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In truth, the effect of pulling the plug on quantitative easing is likely to have a moderate tightening effect on the U.S. economy. Republican "belt-tightening" may also constrict. And earnings growth for small, domestic-oriented firms will decelerate. They will still grow, but at a slower pace.
It follows that an accelerating "P" for the iShares Russell 2000, coupled with a decelerating "E," might make the P/E look a bit ridiculous. In contrast, the P/E for larger-caps in SPDR S&P 500 Trust should still look historically reasonable.
As of this moment, however, there's precious little evidence to suggest that a transition is taking place. On the one hand, institutional investors dumped $450 million shares of IWM Thursday, March 3, on 1.8 times the normal trading volume. That represented a 3% reduction in assets under management. On the other hand, IWM is a mere 0.7% off its 2011 top. The SPY is 0.8% off its multiyear peak.
Here's a month-over-month breakdown for popular small-cap and large-cap ETFs:
- Vanguard Small Cap (VB) - Get Report has risen about 4.1% over one month.
- iShares Small Cap Growth (IJT) - Get Report has risen about 3.6% over one month.
- iShares Russell 2000 (IWM) - Get Report has risen about 3.1% over one month.
- First Trust Microcap (FDM) - Get Report has risen about 3.0% over one month.
- iShares Small Cap Value (IJS) - Get Report has risen about 2.8% over one month.
- iShares S&P 500 Growth (IVW) - Get Report has risen about 2.3% over one month.
- DIAMONDS Trust Series (DIA) - Get Report has risen about 2.2% over one month.
- PowerShares QQQ (QQQQ) has risen about 2.1% over one month.
- S&P 500 SPDR Trust (SPY) - Get Report has risen about 2.0% over one month.
- iShares S&P 500 Value (IVE) - Get Report has risen about 1.7% over one month.
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Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.