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Sector ETFs in Small Packages

U.S. small –caps have delivered stellar returns this year. The iShares Russell 2000 ETF (IWM) , the largest small-cap ETF by assets, is up 31.1% while the iShares Core S&P Small-Cap ETF (IJR) is higher by 34.3%.

The returns offered by broader small-cap ETFs have been too compelling to ignore, but there are potentially big opportunities with small-caps at the sector level that investors should consider as well.

“S&P 600 Index constituents are projected to grow 22% in 2013 and 32% in 2014, respectively, according to Capital IQ consensus estimates, compared to 5.7% and 11% for members of the S&P 500 Index. However, not surprisingly, all small-cap sectors are not expected to grow equally in 2014, with Energy, Information Technology and Materials significantly leading earnings prospects of Financials, Telecom and Utilities,” according to a new research note from S&P Capital IQ.

Investors looking to take a more tactical approach to small-cap investing can do just that with the PowerShares lineup of nine sector ETFs, which debuted three and a half years ago as the small-cap counterparts to the sector SDRs ETFs made famous by State Street Global Advisors.

Some of the PowerShares small-cap plays have been sound performers this year. For example, the PowerShares S&P SmallCap Energy Portfolio (PSCE) is higher by 38.2% while the PowerShares S&P SmallCap Information Technology Portfolio (PSCT) is up 32%. [10 Small-Sector ETFs With Big Returns]

PSCT is the largest of the nine PowerShares small-cap sector funds with $207.4 million in assets, double what it had last year. PSCT “is well diversified at the industry level with 10% exposure to the Semiconductors, Internet Software & Services, Electronic Equipment & Instruments and Application Software industries. This and the other PowerShares ETFs have a modest 0.29% expense ratio, according to S&P Capital IQ. PCST also ranks favorably to S&P Capital IQ for its bullish technical trends, but this is offset by a number of holdings with below-average S&P Capital IQ Quality Rankings,” said S&P Capital IQ.

S&P Capital IQ has marketweight ratings on PSCT and the $76.8 million PowerShares S&P SmallCap Industrials Portfolio (PSCI) . PSCI is higher by 28.5% this year, but seasonal trends indicate the ETF could be one to watch in the coming weeks. [Industrial ETFs: November Strong]

While the PowerShares S&P SmallCap Consumer Staples Portfolio (PSCC) has jumped 37.3% this year, S&P Capital IQ is less than enthusiastic about that fund, giving it an underweight rating on the basis of its heavy exposure to packaged foods and meat stocks.

PowerShares S&P SmallCap Information Technology Portfolio

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of IWM.

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.