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Cyclical Rotation The Small-Cap Way


The iShares Russell 2000 Index Fund (IWM) is off 2% in the past week and that may be viewed as a sign that all bets are off for small-cap bulls. IWM has enjoyed some good times this year with a gain of about 11.5% and that may be enough for investors to say that the recent turbulence in U.S. equities is reason to leave small-caps for another day.

Not so fast. IWM offers plenty of exposure to cyclical rotation sectors with financials, consumer discretionary and technology combining for almost 53% of the ETF’s weight. Additionally, many small-cap companies are focused on their home market. With IWM, that means the U.S. and that means IWM is alluring as a strong dollar play. [ETFs That Benefit From a Rising Dollar]

Investors with a tolerance for risk have more small-cap ETF options than they may be aware of. In 2010, PowerShares, the fourth-largest U.S. ETF sponsor, rolled out a suite of small-cap ETFs to designed to be equivalents to the popular, large-cap focused sector SPDR funds. Some of these funds have been perking up in recent weeks and could be small-cap leaders if conservative sectors continue falling out of favor with investors. [Trading Smaller ETFs]

PowerShares S&P SmallCap Information Technology Portfolio (PSCT)

The PowerShares S&P SmallCap Information Technology Portfolio is showing a divergence from large-cap technology and it is one investors might to take note of. In the past month, the PowerShares QQQ (QQQ) is slightly lower, but over the same time, PSCT has jumped 3.7%. That performance is also better than triple what IWM has offered over the same time. [Small and Micro-Cap ETFs]

The average market cap of PSCT’s 126 constituents is almost $1.3 billion, so investors can rest assured they are not dancing with ultra-volatile micro-cap fare with this ETF. Unheralded PSCT has almost $132 million in assets under management and despite its light average daily volume (19,400 share), the ETF rarely trades at a significant discount or premium to its net asset value.

PSCT offers exposure to hardware, software, Internet and semiconductor names, among others.

PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD)

The PowerShares S&P SmallCap Consumer Discretionary Portfolio joins PSCT as another small-cap ETF for investors looking to exploit the cyclical rotation. And like its technology-focused counterpart, PSCD outperformed a major large-cap equivalent and IWM over the past month. While the Consumer Discretionary Select Sector SPDR (XLY) lost ground over that time, PSCD gained 2.6%. In fact, PSCD has been the better over the past 90 days and year-to-date as the ETF is up almost 18%.

And as is the case with PSCT, PSCD offers a lineup that is not chock full of obscure, risky micro-caps. PSCD’s 106-stock lineup is actually littered with companies consumers are intimately familiar with including Buffalo Wild Wings (BWLD), Coinstar (CSTR) and Crocs (CROX).

The risk to PSCD is obvious: Any noticeable retrenchment in the quality of consumer-related economic data could make this ETF vulnerable to selling pressure. A drop below support at $38 could do the same.

PowerShares S&P SmallCap Information Technology Portfolio

ETF Trends editorial team contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.