Playing a Small- and Mid-Cap Comeback

04/08/2008 12:00 am EST


Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

James Lowell, editor of Forbes ETF Advisor, says small- and mid-cap stocks beat blue chips, even if they lag in recessions, and now may be a good time to buy some.

These days, and for nearly three years running, small- and mid-cap stocks have been told their numbers were up; they'd come too far from the low-water mark of the most recent 2002 bear market trough to make a sustainable run.

True, small- and mid-caps lost a bit more so than the so-called "safe haven" large-cap brethren. And over the next three months they may follow a similar pattern. But over the next 12 months, and certainly for years to come, most investors (especially growth-oriented ones) can benefit from holding meaningful stakes in both camps.

Small- and mid-cap companies offer benefits beyond the prospect for faster earnings growth rates. Innovation is part of their elan. But I favor ETFs that favor real products, proven management, and established revenue, as well as companies that offer the premium of either being acquired or being smartly accretive in their own roll-up designs.

Is now a good time to consider small- and mid-cap ETFs? I'd say it's always a good time to consider them. None of these ETFs were around for the recession that I think mirrors the one we're in (1989-1991), but during that recession, small- and mid-cap stocks lost more than large-cap stocks, and took longer to recover.

Still, for long-term investors, having bought back then would have netted you dramatically better gains along the volatile route to where we stand today; mid-caps absolutely blew away large-cap stocks over the past two decades. Small-cap stocks fared better than the Standard & Poor's 500 over that time period, but by inches compared to the mid-cap miles.

iShares Russell Midcap (NYSEArca: IWR) The largest three sectors here are financial services (20.1%), consumer discretionary (15.5%), and technology (10.4%). The top holdings are Hess, CSX, Chesapeake Energy, Weatherford International, Air Products & Chemicals, and Williams Companies. (It closed below $98 Monday-Editor.)

StreetTRACKS DJ Wilshire Small-Cap Growth (Amex: DSG) seeks investment results that correspond to the price and yield performance of the DJ Wilshire Small Cap Growth index. The largest three sectors are information technology (24.3%), health care (17.4%), and industrials (16.7%). The top holdings are St. Joe, Bucyrus International, Chipotle Mexican Grill, FTI Consulting, and Corrections Corp of America. (It closed below $90 Monday-Editor.)

iShares S&P Small-Cap 600 Growth (NYSEArca: IJT) seeks investment results that correspond to the price and yield performance of the S&P SmallCap 600/Citigroup Growth Index. The largest three sectors are information technology  (22.5%), health care (16.8%), and consumer discretionary (16.6%). The top holdings are Cabot Oil & Gas, Flir Systems, Trimble Navigation, Pediatrix Medical Group, and Oceaneering International. (It closed above $127 Monday-Editor.)

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