|Cumulative Returns of Large-Caps vs. Small-Caps |
|Source: Ibbotson Associates|
"The Only Equity ETF You'll Ever Need!" How's that for a headline you might read on the cover of a monthly magazine? From all the emails I receive, I know that the range of RealMoney and TheStreet.com readers includes investors who want to make full-time jobs out of managing their portfolios with 100 holdings (not kidding) to do-it-yourselfers who want everything they need in just one exchange-traded fund (ETF). To be clear, I don't believe either extreme is ideal for diversification, but nonetheless, there is one segment of the domestic stock market that has done better than the rest of the market over long periods of time: small-cap value. While I could devote an entire white paper as to why small-cap value has been the best performer, that is not the focus here. The short and sweet is that smaller companies tend to do better in the early and middle stages of a stock market cycle. Because bull markets are more prevalent, this means that conditions favor small over large more often than not. Similarly, a steeper yield curve (indicative of economic expansion and growth) tends to favor value companies over growth. Again, because expansion is more prevalent than recession over long periods of time, this means value tends to do better. By combining small-cap and value you get the best-performing market segment. I was able to find seven small-cap value ETFs (if there aren't more than that now, there will be later), three of which are from iShares. All seven use different indices or methodologies to capture small-cap value.