These Small-Cap ETFs Could Thrive Or Falter in the Second Half

As measured by the iShares Russell 2000 Index Fund IWM, small-caps have been lagging the broader market for several months. Over the past 90 days, the iShares Russell 2000 Index Fund is off 2.8 percent, nearly double the loss incurred by the SPDR S&P 500 SPY. The slack performance turned by small-caps can be attributed to any number of factors. What is not up for debate is the fact that small-caps play a critical role in assessing investors' appetite for risk. If small-cap equities and ETFs such as IWM continue to languish, it becomes harder to envision a legitimate return to a go-go, risk on environment. Should the broader market make a sharp move in either direction in the back half of this year, the following small-cap ETFs deliver even better returns...or deeper losses. EGShares India Small Cap ETF SCIN The EGShares India Small Cap ETF and the Market Vectors India Small-Cap ETF SCIF were two of the top-performing small-cap ETFs in the early stages of 2012. Highlighting just how volatile it can be, SCIN moved up to about $17 from $11 in less than two full months. The good times ended in February. By June, India ETFs had tumbled mightily as investors fretted about slowing growth and an array of other macroeconomic issues. Following the savage beatings India ETFs have endured, there might be some value in the group. It's a big "if," but if investors believe the darkest clouds have passed over Indian equities, then SCIN is a steal at a current levels. The fund's recent track record shows it has a tendency to outperform on the way up as well fall more than an ETFs like IWM on the way down. PowerShares S&P SmallCap Energy Portfolio PSCE The PowerShares S&P SmallCap Energy Portfolio is the small-cap equivalent of the Energy Select Sector SPDR XLE and the performance of the duo illustrates just how risk averse investors have been in recent months. In the past three months, XLE is down 3.3 percent while PSCE has plunged 12.6 percent. Decked by falling oil prices, the risk off and a sluggish mergers and acquisitions environment (several PSCE could be viewed as credible takeover targets), PSCE has suffered. However, the fund could finish 2012 with a bang if just two of those three factors start going in its favor. Any violation of support at $28 would be a sell signal. Market Vectors Brazil Small-Cap ETF BRF Just as the iShares MSCI Brazil Index Fund EWZ is an excellent barometer of risk appetite in the broader market, the Market Vector Brazil Small-Cap ETF is an worthy gauge of just how willing investors are to embrace small-caps. Year-to-date, BRF is the better performer, but over the past 30 and 90 days, the fund has lagged EWZ. The road recovery is measured in two steps: first, investors must cherish emerging markets again, and second, they must look past some of Brazil's macro issues. If both happen, BRF could easily rally 10 percent or more before the end of the year. iShares Russell Microcap Index Fund IWC Micro-caps are even smaller than small-caps and that implies a greater degree of risk. Tiny market values also explain why the iShares Russell Microcap Index Fund has a beta of almost 1.4. Here is something interesting about IWC that is rarely, if ever, discussed. As one of the largest and most heavily traded small-cap ETFs, IWM is a favorite of pros and pundits alike in terms of assessing risk. IWM is also heavily shorted and often criticized by ETF naysayers for churn in its underlying index. Love it or hate it, one thing is clear about IWM: It consistently lags IWC in terms of performance. For more ETFs with which to measure risk appetite, click here.