ETF Expert

With the exception of a bit of back-tracking from Dr. Doom (Roubini), there seems to be near unanimity on the notion that the worst is behind us. Indeed, the price surge in foreign small cap stocks relative to foreign large cap-counterparts supports the notion that the worst may be in the rear-view mirror for China, Brazil, Canada, Australia… heck, most of Europe and Asia.

Yet, more than a year ago, I developed a simple method for determining the point at which investors might feel that a recession's impact on the market has concluded; specifically, from the bear market's inception, the smallest companies in the U.S. via the iShares Russell Microcap (IWC) would need to collectively climb above the S&P 500 SPDR Trust (SPY).

It certainly hadn't happened through August of 2008, nor had it happened by the November lows of 2008, nor the March lows of 2009. (Here's a chart of price movement from mid-October 2007 through August 2008.)

Yet with the markets hitting 10-month highs, and with the markets hitting 2009 peaks, could IWC finally eclipse the S&P 500? Could the price of a basket of microcap small fries rise above the S&P 500 proxy to show that… after 21 long months… investor sentiment had truly shifted?

Unfortunately, the evidence suggests that faith in the U.S. market recovery is tenuous. While microcaps in IWC may have gained a bit more off its bottom than SPY, it hasn't been able to close the performance gap substantially. From my vantage point, this suggests that investors remained unconvinced that an economic recovery will be powerful enough for the smallest companies to thrive. (Survive, perhaps… but thrive?!?!?!?)

Compare this to the potential shift of sentiment that is occurring in China. While the Claymore China Small Cap Fund (HAO) only began in February 2008, the existing data suggests that in April of 2009, investors began to see the potential for smaller companies to outperform larger ones in the China 25 Index Fund (FXI). And if there's a "best-is-yet-to-come" feeling anywhere, it may just be on the mainland.

To be completely fair, the small-cap proxy, iShares Russell 2000 (IWM), has shown more resilience than the iShares Russell Microcap (IWC). Since the bear's October 2007 inception, IWM has returned the identical losses as SPY at -37%.

That said, until and unless small company stock funds catch a turbo boost, it's hard to believe that the "best is yet to come." Gains are still probable for U.S. markets, don't misunderstand. That's what one can achieve when the worst truly is behind you. Yet rising deficits and underperforming "stimulus" packages may lead investors to continue looking overseas for answers.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.