Smallcap ETF Review for Investing in Top Markets

7/30/2019 Smallcap ETF Review for Investing in Top Markets

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Smallcap ETF Review

for

Investing in Top Markets

Index Fund Performancefor

Healthcare, Energy and Growth Stocks

A Market Brief

by

Steven Kim

MintKit Investing

www.mintkit.com
http://www.mintkit.com/http://www.mintkit.com/


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Disclaimer This brief is provided as a resource for information and education.The contents reflect personal views and should not be construed asrecommendations to any investor in particular. Each investor has to conduct

due diligence and design an agenda tailored to individual circumstances.

2013 MintKit.com

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Summary

Given the drawcards of an exchange traded fund, a smallcap ETF review for the stock

market lays the groundwork for investing with finesse in bantam firms. To this end, the first

order of business is to select a suitable timespan for sizing up the candidates.

On one hand, a lengthy window of observation provides a heap of data for a thorough

analysis of performance. On the other hand, the broad-based approach has its drawbacks

as well. One stumper springs from the dynamism within the financial forum. Due to the

explosive growth of index funds in the millennium, a prolonged timespan has the side

effect of casting aside numerous entrants that have stepped into the arena only in the

recent past.

For this reason, the wily investor has to strike a balance between the conflicting factors in

order to pick an apt window of evaluation. In striking a compromise, a time frame of three

years seems like a fitting choice in most cases.

From a different stance, the financial crisis of 2008 was a watershed in the global

economy. In recognition of the landmark, a duration of five years ending in spring 2013 has

the advantage of spanning the epic fiasco and its aftermath. For this reason, the longer

window of half a decade can provide a host of pointers on the true nature of motley

markets.

In addition to grokking the price action in the arena, the deft investor takes into account a

number of additional factors relating to the short run as well as the long range. A case in

point is a minimal level of liquidity needed for the artful player to enter and exit a given

market in a timely fashion.

A second hallmark of the savvy investor is an aversion for levered vehicles. The reason

lies in the constant threat of sudden death and/or gradual demise that besets any type of

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rickety scheme based on high gearing. Due to the specter of certain doom, only a

heedless speculator lusts after shaky contraptions pumped up by the gimmicks of

leverage. In other words, the sober investor relies only on sturdy rigs that move with the

target market in a direct and forthright way.

In sifting through a database of index funds focused on smallish firms, a straightforward

approach is to begin with a muster of the front-runners in the field. Then the other factors

such as liquidity and risk can be brought to bear on the appraisal.

In line with this thrust, our search begins with a tally of raw performance over the course of

three years ending in spring 2013. The resulting list of candidates is then whittled down by

the duo of secondary screens. As we noted above, the first filter deals with the liquidity ofthe asset in the marketplace. Meanwhile the second criterion concerns the directness of

the setup; that is, the absence of leverage.

Based on this routine, the top 3 index funds turned out to be PSCH, PSCE and IJT. These

pools focus respectively on the healthcare sector, energy market, and growth stocks.

Within the ranks of acceptable funds based on bantam stocks, PSCH turned out to be the

clear winner. The return on investment for the spearhead displayed a series of higher

peaks as well as rising troughs over the span of three years following its debut in the stock

market in spring 2010.

Of the pair of runners-up, the average payoff for PSCE was comparable to the turnout for

IJT. On the other hand, the latter vehicle was a lot less volatile compared to the former. For

this reason, IJT was the better choice for the genuine investor.

To place the performance of the high flyers in context, the eagles were compared against a

couple of renowned benchmarks of the bourse. Looking at the big picture, the Standard &

Poors index of 500 giants stands out as a popular proxy for the stock market as a whole.

Meanwhile the Russell 2000 Index is arguably the leading beacon within the vale of

bantam stocks.

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Each of the foregoing yardsticks has spawned an index fund of its own. The offshoot

vehicles carry the ticker symbols of SPY and IWM respectively. On the bright side, the trio

of winning funds for smallcap stocks namely, PSCH, PSCE and IJT trounced the

standard benchmarks of the bourse by a comfortable margin.

* * *

Keywords:

ETF, Exchange Traded Funds, Index, Fund, Top, List, Smallcap, Stock, Market, Risk,

Performance, Volatility, Healthcare, Energy, Growth, IWM, SPY, IJT

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* * *

In order to pick the best index fund for a zesty portfolio, a basic step is to compile a list of

the front-runners in the marketplace. In sizing up the candidates, the key criteria include

the return on investment along with the degree of price volatility.

As a rule, the foregoing traits are interlinked rather than independent. For instance, an

exchange traded fund on a growth streak is apt to be more flighty than a plodding rig that

trudges along at a lumbering pace.

In sorting out the clump of tangled issues, a straightforward tack is to start by culling the

leading vehicles in terms of growth. Then the other factors such as risk and liquidity can be

brought to bear on the appraisal.

Before we plunge into the task, however, we will begin with a smattering of background

material. In order to obtain a solid grasp of index funds, the mindful investor has to take

note of the key issues along with the buzz words in the field.

Basic Terms and Prime Benchmarks

In the parlance of the stock market, the overall worth of a company is known as its

valuation. The latter amount is given by the price of the equity multiplied by the number of

shares outstanding.

As an example, consider a corporation that has issued 10 million shares. Moreover we

assume that the current price of the stock happens to be $20 per share. In that case, the

valuation of the firm is the product of the last two figures, which comes out to $200 million.

Some folks refer to the total value of a firm as its capitalization, or more tersely as the cap.

As a result, we end up with labels such as largecap and smallcap.

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On the other hand, the moniker takes on a slightly different meaning for the wonks in the

field of venture financing. In this neck of the woods, the capitalization refers specifically to

the paid-in capital of a fledgling firm.

To bring up an example, a newborn venture might be launched with a pile of seed capital

amounting to $34 million. In that case, the latter figure represents the capitalization of the

company upon its inception.

On the other hand, the valuation of the firm could differ from its capitalization from the very

start. For instance, a snazzy venture based on a breakthrough technology might be highly

prized by a band of early investors in the business. If so, the price of each share could beso lofty that the valuation of the startup as a whole exceeds its capitalization by a factor of

10 or more.

In the financial forum, a company boasting a huge valuation is known as a largecap. The

latter term refers to the corporation as well as its equity. As a rule of thumb, the cohort of

500 biggest firms listed on the bourse are deemed to be largecaps.

A standard bearer of the stock market lies in an index of 500 heavyweights compiled by a

financial advisory named Standard & Poors Corporation, an outfit which also goes by the

nickname ofS&P. The benchmark of big fish in the marketplace happens to be the most

popular proxy of the stock market among professionals players, be they active traders or

passive researchers.

Moving down the ladder of size, a company or an equity boasting a middling level of

valuation is pegged as a midcap. In this domain, a common yardstick lies in a benchmark

of 400 midsize stocks compiled by Standard & Poors.

Last as well as least in terms of brawn, we come to the valley of the small fry. As the name

suggests, a smallcap refers to a bantam firm or its equity.

Looking at the big picture, the total number of companies listed on stock exchanges within

the U.S. comes out to roughly 10,000. In tandem with the previous paragraphs, we can

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deduce that the bulk of public companies fall into the bantam category that covers around

9,000 firms.

From a different angle, the vast majority of outfits that traipse into the marketplace come

and go in quick succession. When a firm is listed on a stock exchange, it might make asplash for a while but the newbie is apt to stumble before long and quit the field within a

matter of years.

The high rate of turnover has a practical import for the players in the know. From the

standpoint of a market watcher, for instance, there is scant sense in trying to keep track of

the entire swarm of small fry at all times.

In line with this viewpoint, one benchmark of the minnows is found in a troupe of 600

lightweights monitored by Standard & Poors. On a negative note, however, this index of

smallcaps is less renowned than the other yardsticks from S&P that happen to deal with

largecaps and midcaps.

According to the custom at S&P, each company under observation is assigned to some

slot or other within an expansive framework it calls the Global Industry Classification

Standard(GICS). The latter template identifies 10 sectors ranging from Materials and

Financials to Information Technology and Consumer Staples.

Despite the standard template, though, an exception of sorts is found in the typecasting of

smallish firms. To take a step back, we note that a utility firm in the real economy is apt to

be a huge concern. Due to the dominance of giants in this area, the stock market does not

contain a lot of midgets within the Utilities sector.

The story is similar in the field of Telecommunication Services. Given the dearth of

flyweights in these markets, the custom at S&P is to combine the foregoing pair of sectors

and merge them into a single category when dealing with smallcap stocks.

In compiling the index of lightweights, another aspect concerns an upper threshold on the

weighting of stocks within a single niche. A simple way to explain the cappedapproach is

to consider the yardstick for the vendors plying their trade in the energy market.

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Within this sector, the raw weight of each security is proportional to the market value of the

shares available for trading by the financial community. Moreover the valuation of the stock

and its peers on the bourse is sampled every three months, then the weights adjusted

accordingly.

The capped approach to weighting comes in a couple of forms. One mode involves an

upper bound by which no stock may possess a weight in excess of 22.5% of the overall

amount at the time the index is rebalanced.

In addition, a second constraint places a ceiling on the clout wielded by a small band of

burly stocks. The latter grouping includes any equity that flaunts a weight in excess of4.5% of the total amount. The sum of the weights for these primos must not exceed 45%

of the combined tally for the index as a whole.

The first of the two rules above helps to ensure that no single stock makes up more than

5% of the total weight throughout the entire stretch from one revision of the benchmark to

the next. In a comparable way, the purpose of the second yoke is to limit the chance that

the husky stocks as a group account for more than 50% of the overall weighting over the

course of a single quarter from one adjustment to the next.

In the land of midget stocks, another beacon lies in a yardstick compiled by a market

watcher named the Russell Company. Before presenting the benchmark of lightweights in

greater detail, its helpful to begin with a kindred index for weighty stocks.

As a starting point, a yardstick known as the Russell 1000 Indexkeeps track of the

thousand largest firms listed in the stock market. For this reason, we can regard the gauge

as a composite index of the largecaps along with the midcaps.

By contrast, the Russell 2000 Indexcovers the next cohort of 2,000 sizable firms. For this

reason, the gauge is widely viewed as a proxy for smallcap stocks.

In line with earlier remarks, the classification of a company is relative rather than absolute.

To spotlight the distinction between relative and absolute sizes, we note that a company

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worth a billion dollars might have been a colossus at the onset of the 20 th century but

counts as a mere lightweight in the modern era.

An outfit at the upper end of the largecaps is also known as a megacap. Plainly, the band

of megacaps makes up a subset of the broader class of largecaps.

Looking in the opposite direction, a shrimp at the lower end of the midget category is also

known as a microcap or a nanocap. As we noted earlier, the stock market is chock-a-block

with thousands of minnows.

From the standpoint of the nimble investor, any attempt to move a sizable amount of cash

in or out of a bantam stock is likely to shift the price level by a hefty amount. For thisreason, the bulk of the small fry are unfit for investment by most players, whether in the

form of lonesome investors or communal pools.

As it happens, the range of valuations within a single category seldom varies a great deal

from one year to the next. At the dawn of the 21st century, a handy classification by size is

found in the following lineup (Wikipedia, 2013).

Megacap: Over $200 billion

Largecap: Over $10 billion

Midcap: $2 billion $10 billion

Smallcap: $250 million $2 billion

Microcap: Below $250 million

Nanocap: Below $50 million

We note that the classification of a midcap is marked by a threshold on the high side as

well as the lowend. The situation is similar for the smallcap category.

In contrast, the other slots within the framework above happen to be open-ended on one

side. As an example, neither a megacap nor a largecap has a ceiling on the valuation of

the equity.

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At the lower end of the spectrum, neither a microcap nor a nanocap comes with a floor by

way of capitalization. In addition, the valuations fall below the lower bound on smallcap

stocks. In particular, a nanocap might be a microcap as well, but it cant be a smallcap.

To recap, a common feature of communal funds lies in the classification of stocks basedon the value of the enterprise reckoned by the investing public. Where size is concerned,

the main groupings take the form of largecaps, midcaps and smallcaps.

Another aspect of communal funds involves a distinction between apparent go-getters

versus prospective firebrands. In this light, the financial analyst likes to classify stocks

according to the past turnout and future outlook for capital gains. In particular, a growth

stockis an equity whose price has risen faster than average for the bourse as a wholeover the past few years, and is likely to outrun the competition going forward.

On the whole, the investing public has a penchant for zippy vehicles rather than sluggish

ones. For this reason, peppy stocks tend to be more pricey than the average level for the

bourse at large.

In sizing up a stock, a standard gauge lies in theprice/earnings ratio; namely, the price of

the equity divided by the earnings per share for the business over the past year. For a

growth stock, this yardstick tends to be higher than the average figure for the bourse at

large.

Another factor involves the nominal value of the assets owned by a company. An example

in this vein is the original cost of acquisition for an entire building or a partial shipment of

equipment.

The book value of a business refers to the overall tab for the assets carried on the balance

sheet. Not surprisingly, the ratio of the market price to the book value per share for a

growth stock is wont to be higher than the average figure for the bourse as a whole.

On the flip side, a value stockcomes with a dimmer outlook than the mean forecast of

growth for the equity market. Given its muted appeal for investors, the security is likely to

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display a lower ratio of price to earnings per share. The same can be said for the

price/book quotient.

According to received wisdom, a value stock is a bargain compared to an overpriced peer.

And in fact, a cheapie can outshine a costly peer as time goes by.

On the other hand, a blind faith in bargains often turns out to be misplaced. As a

counterpoint, some pricey stocks can outshine their cheaper peers for years on end.

As an example, consider a stock that is more costly than the norm in relation to its

earnings per share. For the financial community, the main reason for paying a hefty price

today stems from the prospect of a juicy payoff in the future.

According to the traditional models of finance, the investing public is perfectly rational at all

times. In that case, a stock that is expensive compared to its peers must offer outstanding

prospects downstream. In keeping with this dogma, many a market watcher automatically

tags an overpriced equity as a growth stock without bothering to assess its actual

prospects for the future.

By one line of reasoning, then, the cohort of growth stocks ought to outshine the legion of

value stocks. And that would in fact be the case if investors were completely rational, as

asserted by the mythology of classical finance.

In practice, though, value stocks as a group can outpace the so-called growth stocks for

extended periods; and vice versa. This fact of life of course contradicts the canons of

classical finance. The stumper happens to be another nail in the coffin of orthodox theory.

From a larger stance, a portfolio that holds a mixture of value stocks and growth shares is

known as a blend. The attraction of a balanced portfolio stems from the fact that the lucid

investor has no compelling reason for choosing a value fund over a growth pool as a

matter of course.

In a complex and roily environment, the madding crowd has a habit of shoving one portion

of the stock market or even the bourse as a whole to extremes of high and low that

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give short shrift to the actual status of the past and present as well as the prospective

turnout for the future. Given the berserk actions of the herd, one approach to investment

may well trump another whether the assets in play happen to be value stocks, growth

shares, or anything else.

Despite the wanton ways of the financial bazaar, however, the market displays a slew of

recurrent traits. For one thing, growth stocks tend to be more volatile than their peers in

the value group. For a second thing, growth stocks are prone to excel when the bourse at

large climbs higher; and fall behind in the throes of a downstroke.

Given this background, the choice between growth stocks and value shares depends in

part on the investors appetite for risk. Another vital factor concerns the outlook for thebourse as a whole over the course of the investment horizon.

Selection Criteria

Since the purpose of an investment is to earn a profit, a candidate asset ought to be fruitful

as well as hardy. These generic traits apply to tangible goods as well as virtual wares. An

example of the former lies in commodities or real estate, while an instance of the latter

involves currencies or index funds.

Since the eve of the millennium, the field of exchange traded funds has grown at an

explosive rate. Along with the upthrow, a raft of entrants have popped up only within the

past few years. For this reason, the newcomers offer no track records to speak of.

On one hand, a large cache of data can serve as the fodder for a comprehensive probe.

On the other hand, an investor who insists on an extensive history will thereby exclude a

welter of youthful funds.

Given this backdrop, the adroit player has to trade off the amount of data against the

number of candidates. In that case, a track record of 3 years appears to be a suitable

compromise between the opposing factors.

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In picking the widgets for investment, a second criterion involves the liquidity of the market.

A sluggish niche marked by low turnover is a turnoff for the nimble investor who wants to

enter and exit the market in a timely fashion. As a defensive measure, a volume of 10,000

shares a day seems like an apt threshold on the low side.

A third factor concerns the use of leverage, or lack of such. On a positive note, a levered

position can turn in an outsize gain when the market is on a roll. On the flip side, though, a

high level of gearing results in a crushing loss during the downstroke that duly follows

every upsurge.

As a practical matter, the uptake of leverage opens up a can of worms which is anathema

to the genuine investor bent on building up a nest egg for the long haul. The bogeys athand include obvious threats as well as obscure snags.

To begin with, a bugbear of modest size involves the standard notion of risk. The use of

leverage gives rise to wild swings to the upside as well as downside. The thrashing of

prices shows up in all time frames, from less than a week to more than a decade. The

manic flailing due to a levered position is a headache that the sober investor does not

need to put up with.

From a larger stance, though, the volatility in price is a minor nuisance compared to the

gross specter of a complete wipeout. To compound the muddle, the prospect of utter ruin

is ignored by the bulk of participants in the marketplace. The cavalier gamers who brush

aside the lethal threat run the gamut from casual amateurs to gung-ho professionals.

To add to their plight, the victims of a knockout rarely manage to recognize the true cause

of the rubout even after the fact. In most cases, the stunned folks walk around in a daze

and chalk up the mishap to a wanton act of providence. In reality, though, such a blowup is

the inevitable outgrowth of a reckless wager.

In this way, the embrace of leverage is a rash move that leads to a sorry end sooner or

later. In some cases, the gearing results in the cutdown of wealth in slow motion. A good

example involves a communal fund in which the operators purchase a series of stock

options in a flaky effort to magnify the impact of a rise in price within the target market.

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In practice, though, the bulk of options expire without yielding any kind of payout to the

buyers. More generally, the purchase of turbocharged tools is a losing game over the long

haul for millions of punters.

The sad fate is a universal precept that applies to every market. A rampant example

involves the purchase of call options in order to jack up the returns from a stock index. The

plungers in search of quick profits are doomed to end up in tears as time goes by.

Depending on the context, the steward of a communal fund may opt to take up leverage in

other ways. An example lies in a customized loan from a commercial bank, or a

standardized contract in the futures market. On the downside, though, the levered schemeis sure to bring a heap of grief in due course.

The threat of a total wipeout is far greater than most people realize. To reveal the scope of

the problem, we turn to the financial crisis of 2008 along with its aftershock. In the throes

of the calamity, every major benchmark of the stock market lost more than half the value it

had reached at the prior peak.

In that case, a modicum of leverage by a mere factor of 2 resulted in the obliteration of the

entire principal from the outset, and then some. In certain fields such as the futures

market, a ramp-up by a whopping factor of 10 is par for the course. Meanwhile other

domains such as currency trading allow the gamblers to take up leverage by a factor of 50,

or at times 100 or more. As we have seen, however, even a modicum of gearing is the

path to certain doom.

From a larger stance, a glut of risk is the main cause of the ceaseless barrage of

bombshells in the circus of finance. A fine example involves the swarm of hedge funds that

flit around the marketplace. In this arena, even the elite outfits the lucky punters that

have managed to join the top tier of heavyweights are fated to fall flat and die off in

droves. More precisely, the ghastly rate of attrition thins out the ranks of the high flyers at

the jaw-dropping rate of one-half of their number every couple of years (Kim, 2013).

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Given the welter of hazards both blatant and subtle, taking up leverage is an assured way

to lose out over the long run. For this reason, we will exclude any vehicle that resorts to

gearing in a witless attempt to jack up the returns on investment. In other words, the

proper candidates for a sound program of investment rely on the trusty tack of tracking the

target market in a forthright way without bulking up on the steroids of leverage.

Top ETF List for Smallcaps

In the world of communal funds, a venerable resource is found in an information provider

named Morningstar. At the Web site maintained by the market watcher, one feature is a

basic list of exchange traded funds. The dope on the vehicles includes a tally of

performance over the past 3 years as well as a measure of popularity in terms of the

volume of trading.

As we discussed earlier, a candidate asset ought to feature a modicum of liquidity in order

to enable the investor to buy and sell a stake in a timely fashion. For this reason, we will

consider only widgets that sport a trading volume of 10,000 shares or more on a daily

basis.

As an additional filter, an ETF ought to boast a minimal set of price data in order to support

a meaningful analysis of performance. To this end, a window of 3 years seems like a fitting

requirement.

In line with earlier remarks, the most popular benchmark of the stock market among

professionals be they active practitioners or passive researchers is found in the

Standard & Poors index of 500 heavyweights. Moreover the tracking fund for the

touchstone trades under the ticker symbol ofSPY.

According to a recent tally, SPY turned in an average return of 10.83% per annum over the

course of 3 years ending in spring 2013. In terms of transaction volume, the index fund is

wont to chalk up roughly 138 million shares a day.

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Moving on, we come upon the realm of smallcap stocks. In this arena, the standard bearer

takes the form of the Russell 2000 Index.

The tracking fund for the latter benchmark goes by the handle ofIWM.As a ballpark figure,

the turnover for the index fund amounts to some 42 million shares per day. Over the spanof 3 years ending in spring 2013, the return on IWM came out to 9.26% per annum.

Among the active candidates featuring a turnover of 10,000 or more, the winning

performance was turned in by a vessel based on the SmallCap 600 Capped Health Care

Index. The latter yardstick is part of the gallery of benchmarks maintained by Standard &

Poors.

The tracking fund for the Health Care Index is fielded by an operator known as

PowerShares. The vehicle, which sails under the banner ofPSCH, boasts a turnover of

roughly 19,000 shares. The vanguard bagged a windfall of 15.11% a year on average.

Meanwhile the runner-up in the sweepstakes was a fund based on the SmallCap 600

Growth Index, another yardstick belonging to the S&P family. The index fund, managed by

an operator named iShares, sports the call sign ofIJTand claims a turnover of some

120,000 shares a day. The go-getter snagged a payoff of 12.45% a year.

The third place in the rankings was taken up by the PowerShares S&P SmallCap Energy

fund. The tracking pool, branded as PSCE, has a trading volume in the ballpark of 14,000

shares a day. The hustler nabbed a return on investment of 12.39% a year (Morningstar,

2013).

Curiously, each of the top 3 index funds in the smallcap league focused on the U.S. rather

than abroad. As a result, we can infer that the past 3 years have not been kind to the

equity market in other parts of the world.

In the real economy, the emerging countries have outpaced the developed nations by a

solid margin. On the other hand, the companies listed on the nascent bourses have for the

most part floundered in the interim. Put another way, the equity market in the sprouting

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regions have yet to recover fully from the pounding they received during the financial crisis

of 2008 and its aftermath.

As we have seen in this section, a numeric tally provides a direct and forthright way to

summarize the performance of prospective assets. On the other hand, a graphic display ofthe price action can provide the adept investor with further cues on the essence of the

markets.

Graphic View of Performance

In the modern era, a watershed cropped up with the financial crisis of 2008 along with the

Great Recession. The extreme conditions during the maelstrom served to reveal the inner

fiber of motley assets ranging from stocks and commodities to currencies and realty.

Given this backdrop, a survey of the landscape during and after the financial flap can

provide a wealth of tips for the shrewd investor. The chart below, adapted from Yahoo

Finance (finance.yahoo.com), spans a period of 5 years ending in spring 2013.

In order to serve as a baseline, the blue curve on the exhibit depicts the path of IWM over

the course of half a decade. The nasty plunge on the left side of the display portrays the

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smashup of smallcap stocks during and after the financial crisis of 2008. A couple of years

onward, another blowout popped up with the crash of the bourse in the autumn of 2011.

Turning now to the field of largecap stocks, the green arc renders the course of SPY over

the same interval. Since the latter benchmark focuses on the bigwigs of the bourse, itsbehavior is a tad more restrained than the flailing of the flyweights as embodied by IWM.

To bring up an example, SPY rose a bit less than IWM over the span of a few months prior

to the flare-up of the financial crisis. On the flip side, though, the tracking fund for

largecaps trailed behind the ascent of the smallcaps over the years to follow.

By contrast, the red squiggle on the exhibit depicts the path of PSCH since its launch onthe bourse in April 2010. The trace for the newcomer starts off at the same point on the

chart as the curve for IWM at that juncture. For this reason, any gap in the two paths after

that point reflects a divergence in performance between the vehicles.

As it happens, the companies in the healthcare sector tend to be more stable than those in

many other industries ranging from shipping to biotechnology. For this reason, healthcare

is widely viewed by the investing public as a defensive segment of the stock market.

Despite a series of minor setbacks along the way, PSCH clambered upward at a

measured pace since its rollout. As an example, the dynamo turned in a series of higher

peaks over the past three years. The story is similar for a chain of higher troughs. By this

reckoning, the turnout resembles the outcome for SPY.

On the other hand, the purple curve renders the action for peppy smallcaps in the form of

IJT. The latter fund is a relative oldster in the cosmos of exchange traded funds, as the

vehicle made its debut on the bourse way back in July 2000.

On the left side of the exhibit, we can see that the performance of the growth fund was

nearly identical to that for IWM. Starting in the summer of 2010, however, IJT began to pull

ahead and behave a bit more like PSCH.

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To round up the review, we turn to the energy market in the form of PSCE. As with its

sibling focused on healthcare, PSCE debuted in the stock market in April 2010.

On the upside, the overall return bagged by the energy fund was comparable to the payoff

from IJT over the past three years. On the downside, though, the energy sector was a lotmore turbulent. In keeping with the turmoil in the target market, PSCE endured a wild ride

since its rollout in the marketplace.

Wrapup of Smallcap ETF Review

In order to pinpoint the best funds for investment, an obvious point of departure lies in the

payoff over the past few years. A stumbling block, however, stems from the fact that a lot

of exchange traded funds are relative newcomers to the field.

As a result, the saplings of this breed do not have much of a track record. In that case, an

investor who insists on a lengthy history will end up with a scanty pool of candidates.

In this thorny setting, the worldly investor has to trade off the length of the track record

against the size of the candidate pool. At this early stage in the evolution of exchange

traded funds, a reasonable compromise between the opposing factors is a minimal life

span of 3 years.

From a different standpoint, a graphic view of the price action can provide an intuitive feel

for the marketplace. A showcase lies in the roller coaster during and after the financial

crisis of 2008.

Moreover a concurrent display of the assets under review can highlight any divergence in

performance. An exemplar lies in the tumult of energy stocks that thrashed around far

more than their counterparts in many other sectors.

The difference in behavior is illustrated by the restrained moves of IJT compared to PSCE

ever since the debut of the latter. On one hand, the two funds turned in similar results over

the common span of three years.

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On the other hand, the movements of IJT were a lot more restrained by comparison.

Between the pair of benchmarks based on bantam firms, the genuine investor would

surely favor the broad-based pool of growth stocks over the narrow fund focused solely on

the energy market.

Tips and Caveats

In sifting through a database of index funds, a mindless review of performance is apt to

spit out a bunch of levered vehicles as the top picks. As we have seen, however, gearing

happens to be a double-edged sword that cuts both ways. For this reason, a secondary

group of pumped-up funds is wont to display the worst results within the lineup.

Depending on the fortunes of the stock market at large, the two groups of boosted funds

have a habit of switching places. That is, a ragtag crew of hot vehicles during an uptrend

will likely turn into the worst performers in the midst of a downstroke; and vice versa.

In this spasmodic setting of feast followed by famine, the extreme swings in price bring

loads of grief for the woeful investor. Unfortunately, no one knows in advance whether the

payoff from a soup-up fund will be a bonanza or a catastrophe.

Upon closer inspection, though, the plight of the hapless investor is a lot worse than that.

In order to pursue a levered ploy, the stewards of a pumped-up fund are obliged to go out

on a limb in one way or another. An example in this vein involves the use of turbocharged

tools in the options market or the futures pit.

On the downside, though, each mode of leverage comes with its own form of reprisal. For

instance, consider the use of futures contracts in order to take up leverage by a mere

factor of 2.

Around the time of the financial crisis in 2008, the main benchmarks of the U.S. bourse

lost well over half of their value from peak to trough. These yardsticks included the big fish

in the marketplace which tend to be the least flighty or equivalently, the most stable.

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Leading benchmarks of this breed are found in the Dow Jones Industrial Average and the

Standard & Poors 500 index.

When the target market crumples by one-half or more, a levered scheme based on futures

contracts or bank loans ends up taking a big hit. In fact, the initial principal will be wipedout completely even in the case of gearing by a small factor of two.

Due to the fiasco, the external investors in a communal pool lose their entire trove of

capital committed to the operators at the outset. And once a fund goes bust and conks out,

the game is over for good. In the absence of an obvious swindle, there is no way for the

victims of the disaster to recoup any of their losses.

Thats what happens when dealing with the stocks of gigantic firms which tend to be the

most restrained and robust of all. The predicament is of course worse for the bourse in

general. A showcase lies in the equity market for emerging countries, technology ventures,

or sapling firms.

From a larger stance, the specter of a blowup applies to other modes of leverage as well.

An example involves the uptake of options contracts in order to limit the damage to a

portfolio in case the target market breaks down. For instance, the managers of a levered

fund could purchase a series of contracts in order to take advantage of an uptrend in the

marketplace.

Looking at the big picture, though, the bulk of options traded in the marketplace fade away

and fizzle out without producing any kind of payout at the point of expiration. When an

option expires worthless, the net impact on the owner is the loss of the cash premium paid

at the outset in order to procure the contract in the first place.

More generally, the buyers as a group are swept into the abyss by an endless gush of

losses. In this way, the purchase of options is a losing proposition for the mass of players.

To sum up, levered funds are dicey schemes that lure myriads of investors with wispy

dreams of making a fast buck. The wild-eyed punters can rest assured, however, that

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taking on leverage is an assured way to lose money, whether by way of sudden death or

slow demise.

A vital issue that lies beyond the scope of this report concerns the lack of a panacea in the

financial bazaar. Given the absence of a universal solution, each investor has to assessthe prospective choices in light of individual circumstances.

A prime example of a personal trait is the level of tolerance for risk. Another sample

involves the way in which a given asset complements the other widgets within a multihued

portfolio.

Given the diversity of needs and wants, the best choice of vehicle for one person couldwell turn out to be a lousy pick for someone else. As an example, a particular actor might

decide that a high rate of growth is not worth the heartburn caused by the violent thrash of

prices.

Turning to a different issue, the canny player would do well to consult multiple sources of

information in order to obtain a credible and rounded view of the candidates on hand. A

case in point is a confirmation of past statistics as well as the current state of an exchange

traded fund. Another sample involves the long-range outlook for the target market tracked

by an index fund.

The field of ETFs is still in its infancy. Due to the jejune state of affairs, the information

available on the Web including the data provided by popular portals such as Yahoo

Finance is often beset by loads of flaws. An example lies in a bunch of performance

figures which turn out to be incorrect, inconsistent and/or misleading.

Given the slew of pitfalls in the field, the heedful investor has to tread carefully before

making a crucial decision of any sort. The hazards of faulty information, along with a quiver

of remedial measures, are discussed at greater length in an article titled Cruddy

Information on Exchange Traded Funds (MintKit, 2013). The primer provides a solid

foundation for seeking out the top choice of exchange traded funds, whether by way of a

smallcap ETF review or any other means in fixing up a cogent program of investment.

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References

Kim, S. Wildcats of Finance. http://www.mintkit.com/Wildcats-of-Finance tapped

2013/5/1.

MintKit Core. Cruddy Information on Exchange Traded Funds.

http://www.mintkit.com/cruddy-information-exchange-traded-funds tapped 2013/5/1.

Morningstar. ETF Returns. http://news.morningstar.com/etf/Lists/ETFReturns.html

tapped 2013/4/16.

Wikipedia. Market Capitalization. http://en.wikipedia.org/wiki/Large-cap tapped2013/5/1.

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http://www.mintkit.com/Wildcats-of-Financehttp://www.mintkit.com/cruddy-information-exchange-traded-fundshttp://news.morningstar.com/etf/Lists/ETFReturns.htmlhttp://en.wikipedia.org/wiki/Large-caphttp://www.mintkit.com/Wildcats-of-Financehttp://www.mintkit.com/cruddy-information-exchange-traded-fundshttp://news.morningstar.com/etf/Lists/ETFReturns.htmlhttp://en.wikipedia.org/wiki/Large-cap

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Smallcap ETF Review for Investing in Top Markets

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