(Dow Jones) The past year's small-cap stock rally may well be spent, but a raft of new exchange-traded funds with bullish marketing materials suggest fund companies still smell opportunity.
Small-capitalization stocks, usually those of riskier or less established companies, typically lead large-caps as the economy recovers from a recession. During the past year, the pattern has unfolded like clockwork: The Russell 2000 index of small-company U.S. stocks has returned 49%, compared to 40% for larger companies in the Russell 1000.
Fund complexes have responded by rolling out more than a dozen new ETFs targeting niches like small-cap financials or Canadian stocks. What those creators haven't always made clear: The right time to make this bet was probably months ago.
Research, such as a 2009 study by Russell Investments, suggests that investors hoping to beat the market with small caps should buy around the time the economy stops shrinking and starts to grow again. Many economists think that shift took place last fall.
"We're in the third quarter of an economic turnaround," says Stephen Wood, Russell's chief market strategist. "Small caps have done very well since the bottoming of the market."
Marketing materials sometimes brush over the importance of betting early with small caps. Invesco Ltd.'s (IVZ) PowerShares unit recently launched nine small-company U.S. sector ETFs, targeting areas of the market like financials and healthcare stocks. The fund family's Web page claims, "During the 36 months following each of the last 15 recessions, small caps outperformed large caps by an annualized average of 5.6%"
While that may be true, it fails to mention investors buying one of the funds today--or for that matter on April 7, the first day they became available--would be buying well past the start of the 36-month span. That means they likely cannot expect the kind of returns the Web page highlights.
Ben Fulton, PowerShares managing director of ETFs, defends their marketing. "In the past you see the largest outperformance in year one, but you've still tended to have nice outperformance up to 36 months out," he says.
Fulton adds that since the PowerShares funds target individual sectors, investors might be betting one of those individual industries was still mired in recession, despite growth of the rest of the economy.
Other firms that have launched small-company ETFs recently include Rye Brook, N.Y.-based IndexIQ , whose funds aim at small stocks in countries including Canada and South Korea, and New York-based Van Eck Associates Corp. which launched one targeting Latin America last month.