Small-Cap Sector ETF's

Back in April PowerShares came out with its lineup of Small Cap Sector ETFs, making it easier for small-cap investors to play certain sectors of the market. This is a huge deal, and I recommend you pay attention to these funds.

We all know about the Standard and Poor 500, the index is comprised of 500 large-cap stocks that are widely used as a representation of 'the market'. If somebody tells you the average market return over the last 10-years was 7 percent annually they are probably referring to the S&P 500. Investors who want to buy an ETF that tracks the S&P 500 can easily purchase the SPDR S&P 500 Trust ETF (NYSE: SPY).

But investors who want to purchase an ETF that tracks just one sector of the S&P 500 can do that too. The firm Select Sector SPDRs offers specialized ETFs for each of the nine sectors in the S&P 500. If you were to purchase each ETF in the right proportion, you could emulate a position in the SPY, albeit with much higher transaction costs. Of course, the point of segmenting the S&P 500 is to allow investors to be selective, and to offer choice.

Now small cap investors can do the same thing with the S&P Small Cap 600. What these new funds will allow us to do (if the funds are balanced properly) is to compare the performance of one sector of small-cap stocks with another. Equally important, we'll be able to approximate the performance of small-cap stocks in one sector with large-cap stocks in the same sector. Or we can compare small-caps in one sector with small-caps across all sectors, etc., etc. By this point you get the picture. We're going to have a lot more granularity when it comes to segmenting small-cap stocks.

You'll notice that PowerShares has followed Select SPDRs' ticker convention, but has added the 'S' at the end, presumably to denote small-cap stock. In the table below I've also tried to make it easier to tell the difference by highlighting the large-cap ETFs in light green.

There are two sets of returns calculated in the table below: the first column shows the return of the corresponding ETF from 4/7/10 (the small cap ETFs inception date) to Tuesday's close. The second column shows the return of the ETFs from June 10th to the closing price on Tuesday. These two returns show how the ETFs have done since inception roughly 4 months ago, and over the last two months.

There are a few things that caught my attention when looking over these returns.

First, since the inception date on April 7th, returns for both large-cap and small-cap ETFs are negative, with small-cap ETFs underperforming large-caps. The return of SPY and IJR from the inception date to Monday's close was -5.1 percent and -7 percent, respectively.

Second, small-cap consumer staples have outperformed the corresponding large-cap ETF. The small-cap ETF returned 3.3 percent from the date of inception to the close on Tuesday while the large-cap consumer staples ETF had a negative 2 percent.

Third, both small cap and large cap utilities have been strong since the inception date, and have been picking up steam. The small-cap utilities ETF returned 2.8 percent in just over 4 months while the large-cap utilities ETF returned 3.6 percent in the same amount of time. Both have also been strong over the last two months, returning 7.1 percent (large cap) and 11.5 percent (small cap).

This article originally appeared on SmallCapInvestor.com.