Pay Attention To These Small-Cap Sector ETF’s (SPY, XLES, XLFS, IJR)

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 (NYSE: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.

    Return-to-date from:
Sector Ticker 4/7/10 6/10/10
Consumer Discretionary (XLY) -4.0% -0.7%
  (XLYS) -10.9% -5.3%
Consumer Staples (XLP) -2.0% 2.2%
  (XLPS) 3.3% 3.0%
Energy (XLE) -6.1% 2.6%
  (XLES) -7.3% 3.2%
Financial (XLF) -9.9% 1.8%
  (XLFS) -6.6% 2.2%
Healthcare (XLV) -6.9% 3.3%
  (XLVS) -5.9% 0.6%
Industrials (XLI) -2.2% 6.0%
  (XLIS) -5.1% 2.6%
Materials (XLB) -7.0% 6.6%
  (XLBS) -9.5% 6.3%
Technology (XLK) -4.6% 3.0%
  (XLKS) -8.2% 3.1%
Utilities (XLU) 3.6% 7.1%
  (XLUS) 2.8% 11.5%
Entire Index (SPY) -5.1% 3.0%
  (IJR) -7.0% 0.8%

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 (NYSE:SPY) and (NYSE: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).

However, not all sectors have been so hot. The consumer discretionary ETFs for both small-caps and large-caps have gotten crushed since April 7th. The return for the small-cap consumer discretionary ETF in the stated time period was -10.9 percent while the large-cap ETF lost -4 percent in the same time period.

***Each of these funds is listed on the NASDAQ, and has an expense ratio of 0.29%. That’s a pretty low expense ratio for an ETF; the average is closer to 0.5%. Invesco PowerShares, managing director of global ETFs, had the following to say on the company’s ‘first mover’ status with small-cap sector ETFs,

“We take great pride in being a leading ETF innovator, and are pleased to introduce a unique suite of small-cap sector portfolios that offer investors access to a vibrant portion of the U.S. equity universe…Over the long term, small-cap companies have outperformed large caps with much of this out-performance occurring during post-recessionary periods. We believe the PowerShares S&P SmallCap Sector Portfolios provide investors a compelling new way to implement sector-based strategies using the beneficial ETF structure.”

I couldn’t agree more, and I’m excited to add each of these funds to my watch list. But one word of caution: don’t go out and just buy the fund that covers the small cap sector that you think will outperform.

Liquidity will take some time to pick up on these funds, and you’ll definitely want to do some research to see exactly what the allocation in each particular fund is. But with a little homework on these ETFs we will be able to save a ton of work that was previously required to follow sector trends in small-cap stocks.

The bottom line is that these small-cap ETFs give us another opportunity to easily invest in specific sectors. Looking at the performance of each sector and following these ETFs will give us a better idea where to put our money in the future.

 Written By Ian Wyatt From Wyatt Investment Research

Wyatt Investment Research is led by founder Ian Wyatt, who serves as Publisher and Chief Investment Strategist. Our team also includes a group of talented research analysts and editors who aim to uncover great investments and present those investment ideas to our growing group of loyal subscribers.

Ian Wyatt is an active investor, a well-regarded investment expert and an Internet entrepreneur. He is the Chief Investment Strategist at Wyatt Investment Research, and plays a leading role in each of the company’s investment newsletters and trading services. As a well-regarded market expert, Ian has written for Marketwatch, Zacks Investment Research, Seeking Alpha, Yahoo! Finance and The Burlington Free Press. He has been interviewed or quoted in articles in well-known publications including AOL Finance Blogging Stocks, Kiplinger’s Personal Finance Magazine, Barron Magazine,,, The Dick Davis Digest, The Dick Davis Income Digest, The Wall Street Transcript,, Money Show Digest, The New Jersey Star Ledger, The Wisconsin State Journal and The Seattle Times.

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