In my December 2009 article A Lost Decade for U.S. Stocks, I mentioned that the S&P 500 lost 23% from Dec 31, 1999 through Dec. 14, 2009.

A recent article in the Journal titled “Small Caps Loom Large” notes that the small cap stocks in the U.S. have rallied strongly since the decade that began Jan 1, 2000 when large caps have lost ground.

Some key points from the article:

• The S&P 600 Index, a small-stock index, gained nearly 100% during the period, producing an annualized return of 7.1%. In the same period, S&P 500 has lost almost 2% per year for a total loss of about 18%
• The Russell 2000, another small cap index also shows a similar pattern
• The S&P 600 is trading at 2010 P/E of less than 22 compared to S&P 500’s P/E of 15
• Small caps benefit more quickly when the economy recovers

Chart – Small Caps vs. Large Caps :

Click to Enlarge

U.S. Small Cap ETFs:
iShares S&P SmallCap 600 Index Fund (IJR)
iShares Russell 2000 Index Fund (IWM)
iShares Morningstar Small Core Index Fund (JKJ)
SPDR DJ Wilshire Small Cap ETF (DSC)
Vanguard Small-Cap ETF (VB)
Schwab U.S. Small-Cap ETF (SCHA)

International Small-Cap ETFs:
iShares MSCI EAFE Small-Cap Index Fund (SCZ)
International Small-Cap Fund (GWX)
FTSE Developed Ex-US Small Cap ETF (IFSM)
Vanguard FTSE All-World ex-U.S. Small Cap ETF (VSS)
SPDR S&P Emerging Markets Small Cap (EWX)

Source: Seeking Alpha, ETF Trends

As individual small cap stocks can be very volatile and may have low daily trading volumes, it is easier and wise to invest in them with ETFs.

The following graph shows the eight richest countries by value of their natural resource reserves according to research by Citigroup. South Africa tops the list with its non-energy natural resource reserves valued at $2.5 Trillion. The developed countries in this ranking are the U.S., Canada and Australia.

Some of these markets have become expensive after the huge run up since the March lows of 2009. For example, the South African ALSI Index is up 55% since the lows reached last year. Accordingly the P/E ratio has jumped from 9x earnings at the start of 2009 to over 17x times earnings now. This is well above the long-term average of 11.5 times earnings.

The country-specific ETFs for the above countries are:

• iShares MSCI South Africa Index Fund (EZA)
• iShares MSCI Russia Capped Investable Market Index Fund (RTS)
• iShares MSCI Australia Index Fund (EWA)
• iShares MSCI Canada Index Fund (EWC)
• iShares MSCI Brazil Index Fund (EZA)
• iShares FTSE/Xinhua China 25 Index Fund (FXI)
• iShares MSCI Chile Investable Market Index Fund (ECH)
• iShares S&P 500 Index Fund (IVV)

Note: I have used the S&P 500 as the proxy for the boarder US market.