Marc Pado Comments: Managers Playing Catch-Up: Could Small-Cap ETFs Feel The Pressure?

December 14, 2010, Barrons

The LA Times’ Tom Petruno noting that after the nice run by stocks in the past three-plus months, the final weeks of 2010 may come down to how many fund managers are ready to take profits and sell.

That might sound like an obvious statement, but consider the other side: managers who are trailing their indexes and need to squeeze every available ounce of positive returns the market can give them.

What Petruno is getting at is the end-of-year battle by portfolio managers — both in mutual funds and hedge funds — to spruce up returns.

It’s a silly game, but a big-money one at that.

Traders note in the report that many fund managers were late recognizing what turned into a more than 18% gain since the end of August.

“Some veteran traders say the market’s gains last week had the scent of desperation-buying by investors who are playing catch-up,” Petruno wrote.

And Marc Pado, U.S. market strategist at Cantor Fitzgerald, says in the piece that playing catch-up is likely to show the most in smaller-cap stocks.

“Those stocks, which are easier to push up (and down) than blue chips, offer a way for fund managers to juice their returns in a rising market,” Petruno notes.

It might be harder to push around an ETF like the iShares Russell 2000 (IWM), which has more than $17 billion in assets and monster volume compared to its competitors. But newer ETFs or less popular ones might be vulnerable at this time of year.

An ETF like the iShares S&P SmallCap 600 Index (IJR) probably still has enough liquidity and a broad enough portfolio to hold up.

But what about funds with fewer holdings, smaller market caps and light on volume such as the First Trust Dow Jones Select MicroCap Index (FDM) or the PowerShares Zacks Micro Cap (PZI)?

A general rule of thumb often mentioned throughout the year is that an ETF with trading volume averaging less than 100,000 shares a day might be vulnerable.

“In the case of micro-cap ETFs, you might run into liquidity issues at the end of the year,” said Michael Johnston, analyst at “It’s just something to keep in mind.”