A sustainable economic recovery is likely to not be intact until financial institutions start lending and the credit markets loosen up, at which time small-cap exchange traded funds (ETFs), like the iShares Russell 2000 (IYW), the PowerShares Dynamic Small Cap (PJM), the Vanguard Small-Cap ETF (VBR) and the PowerShares Zacks Small Cap Portfolio Fund (PZJ) will reap the benefits.

Historically speaking, small caps have been the leader in sustainable economic recoveries.  One reason behind this is that small-cap companies, which generally have market values of under $2 billion, are more nimble and quicker to react to changes in market conditions and therefore are more likely to reap the growth benefits of increased lending than large-cap companies.

According to a recent release by the Federal Reserve, bank loans in general are down more than 20 percent from their 2008 peaks, suggesting that small-cap companies are still growth restricted due to lack of much needed credit to grow.

Although enhanced financial regulations may not enable banks to lend at the same rate as seen in 2008, there is still plenty of credit that can be made available.  Once the credit markets open back up, small-cap ETFs, like the ones mentioned above, are likely to be the benefactors. 

Disclosure: No Positions

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