Changing Market Dynamics and Small-Cap ETF Owners

NEW YORK ( ETF Expert) -- For the better part of six months, small-company stocks have outperformed large-company stocks. That's not unusual for an unapologetic bull rally. Indeed, if investors are embracing risk, then they are typically willing to pay a higher price to own faster growing corporations.

Since the beginning of October, however, riskier holdings have been losing momentum to the large-cap bellwethers. The iShares Russell 2000 ( IWM): SPDR S&P 500 Trust ( SPY) price ratio demonstrates the relative weakness in smaller company stock shares.

Courtesy of StockCharts.com

Granted, the major news outlets tend to focus on the Dow, the Nasdaq and the S&P 500. Moreover, many programs enjoy enhanced ratings by covering sexy topics like the Twitter ( TWTR) initial public offering.

Still, it may be a disservice to viewers when talking heads celebrate factoids like, "the market has been up for 17 of the last 20 trading days." Expressing enthusiasm for the Dow in this manner may ignore other facts, like IWM trading at the same price that it did at the start of October.

Courtesy of StockCharts.com

Is it possible that investors are beginning to grow squeamish about small company valuation? Are trailing P/Es of 85 and forward 12-month P/Es of 25 a little too rich for some people's blood? Hard to say. Yet, a continuation of Federal Reserve interest rate manipulation alone does not seem to be reason enough to overweight IWM.

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