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Small-Caps Getting Pricey


On above average volume, the iShares Russell 200o ETF (IWM) gained almost 1% Thursday to race to a fresh all-time high. The rub is that small-caps, which usually trade at higher valuations than their mid- and large-cap counterparts, are getting a tad rich in the valuation department.

When the Russell 2000 Index gets to 1,100, it will be trading at a price-to-earnings ratio of just above 18 for its 2013 forecasts, well above the long-term average of 14.9, reports Alexandra Scaggs for the Wall Street Journal, citing Bank of America Merrill Lynch.

BofA Merrill Lynch also noted most small-cap sectors, technology being the exception, are trading at valuations above their long-term averages. The bank pointed out that consumer discretionary and staples small-caps look pricey, the Journal reported.

The PowerShares S&P SmallCap Consumer Discretionary Portfolio (PSCD) and the PowerShares S&P SmallCap Consumer Staples Portfolio (PSCC) have an average P/E of 21.5, according to PoweShares data.

Only the PowerShares S&P SmallCap Utilities Portfolio (PSCU) has a P/E of 19 among the nine PowerShares small-cap sector ETFs.

On the other hand, investors have been rewarded, to this point, by paying up for performance. IWM is up nearly 31% this year, but that PSCC is up nearly 39% while PSCD is up 35%. The Power Shares S&P SmallCap Energy Portfolio (PSCE) is up almost 44.5% this year. [Small-Cap ETFs Pack a Big Punch]

The PowerShares DWA SmallCap Momentum Portfolio (DWAS) , this year’s best broad market small-cap ETF, has also rewarded investors willing to embrace pricey stocks. DWAS hit a new all-time high Thursday on roughly two and a half times the average daily volume.

The ETF’s methodology, which centers around identifying 200 small-caps with robust relative strength, may blur the line between active and passive management, but that does not discount the fact DWAS has surged 37.2%.  The largest sector weight in DWAS is almost 29% to health care and health care small-caps also trade at valuations above what is found on the Russell 2000 Index. [Soaring Small-Cap ETF Changes up a Bit]

*Chart posted in WSJ story.

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.