By: Larry MacDonald
The rebound off market bottoms is usually explosive for small caps. Their average gain in the year following the past seven bear markets surpassed 30%, writes Viking Capital CEO John Sartz in the Nov. 21 edition of Investor’s Digest of Canada.
And once in, you might consider staying. Studies by leading academics such as Kenneth French and Eugene Fama find that small caps average 12% annually over the long run.
The current downturn for small caps is the worse of the past seven says Sartz. Small cap indexes are down by over half. Past declines were 28% to 43% from market peaks. The spring back after the 2008 bear could be exciting.
We are in the midst of tax-loss selling season too and a lot of small caps are down for that reason. If past tendencies emerge, January could see good snap back.
So small-cap exchange-traded funds (ETFs) look like good places to deploy funds if you are one of the brave now looking to buy low and sell high. In Canada, there is the iShares CDN SmallCap Index Fund. In the U.S., there is:
• iShares Russell 2000 Index
• iShares Russell Microcap Index
• SPA Market Grader Small-Cap 100
• First Trust Small Cap Core AlphaDEX
• PowerShares Dynamic Small Cap
• RevenueShares Small Cap
8 Responses to “ Small-caps primed for take off ”
Small caps are quite tempting, but nervous investors should be cautious. Their higher volatility means that the lows during bad times are even lower than the rest of the stock market. I like small caps, but investors who feel the need to include bonds in their long-term portfolios might not have the stomach for small caps.
By Michael James on Nov 19, 2008
Small Cap Tech, Big Opportunity… Few people want to buy small cap technology stocks now, but soon, you’ll wish you had.
By Carlye Antony on Nov 20, 2008
I am wondering if this “etf” is really just a mutual fund with a low MER. The change in holdings from Sept 30/08 to now is very suspicious. For instance, how did CML Healthcare end up the largest holding at 1.98% on Nov 21 yet only accounted for 1.23% on Sept 30? Even if there was an influx of capital, the holding should remain relatively constant. Why is Keyera now a 1.59% holding when on Sept 30 it was only 1.23% (and yet the trust has fallen 25%)? Seems like these guys are changing the index in mid-stream; I think I’ll stay away. I’d love to hear your thoughts Larry.
By paul on Nov 23, 2008
Michael:
Small caps are indeed volatile. That point needs to be emphasized
Carlye
I guess I would prefer to hold a diversified basket of small caps as with the ETF.
By Larry MacDonald on Nov 23, 2008
Paul
My initial thought was that the change in relative weights may reflect changes in relative price movements. But I would like to dig around more to confirm that.
LM
By Larry MacDonald on Nov 23, 2008
We have been doing some quant based research on Canadian small-cap tech stocks and are finding some companies that see quite cheap.
If you’re interested check it out at
http://dollartonvc.com/articles.php
By Travis on Nov 25, 2008