Small Cap ETFs Prove Draw For US Investors

by Philip Morton, Investors Offshore.com

12 March 2002

According to a report in the Wall Street Journal last week, Exchange Traded Funds (or ETFs) tracking indexes of small cap companies are proving a powerful draw to US investors, and have attracted $31 billion in new investor money over the last year.

ETFs are similar to index mutual funds, except that they trade on stock exchanges, and are bought and sold in the same ways as stocks. According to the WSJ, as more and more small cap mutual funds are closing their doors to new investment, US investors are snapping up ETFs trading in small companies as a viable alternative.

'These funds are an easy and cheap way to gain access to that (small cap) market,' Mariana Bush, a fund analyst for First Union securities, told the newspaper. 'And the history has shown that (small cap funds) tend to outperform large caps in the beginning of economic recovery.'

Russel Kinnel, Morningstar's director of fund analysis supported this point, arguing that the strong performance of mutual funds dealing in smaller companies has, in a certain sense, been their downfall, as too much money makes it difficult for mutual fund managers to manouevre in a manner sufficiently nimble for the small cap market, where stocks are often illiquid.

'It is rare to find a fund that has a good long-term record, [is] still open and isn't overwhelmed by assets,' he observed, explaining the reasoning behind the sudden surge of interest in ETFs.

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