The Vanguard Extended Market ETF (VXF), which invests in 3,000 of the largest stocks not contained in the S&P 500, is up a healthy 8 percent this year, compared to an S&P 500 and Dow Jones Industrial Average that are little changed for 2010. The exchange-traded fund, which is based on the S&P 500 Completion Index, is down about the same amount from its high for the year as the large-cap indexes.
"The equity rally that started in March 2009 is much more intact than one might believe just looking at large cap names,” wrote Colas, in a note to clients this morning. "Such a major divergence has created the greatest equity ‘stealth rally’ since the 2008 financial crisis."
The wide-ranging index, whose top holding include Delta Airlines, Blackrock and Cablevision, has held up better as global growth concerns out of Europe and China weigh on the multinationals that make-up the S&P 500 and the Dow. Meanwhile, the domestic U.S. economy, where companies in the Extended Market ETF do business for the most part, has been steadily improving. The U.S. economy is looking even better on the global stage considering the concerns about the collapse of the Euro.
The Gulf Oil Spill plaguing the energy industry hasn’t helped the S&P 500 either. Colas points out that energy makes up 11 percent of the S&P 500, whereas smaller indexes have half as many energy companies. The country’s energy industry is made up of very large conglomerates in the S&P 500 that are taking the heat right now. Meanwhile, the smaller energy companies, which sell coal and natural gas, have actually benefited in many cases from the disdain for oil producers.
Over one year, the S&P 500’s performance looks even more pitiful. Colas put it up against 19 other indexes that track different slices of the total stock market and the traditional benchmark for U.S. stocks came in second to last behind the Dow Jones Wilshire Large Cap Index. The DJ Wilshire Mid Cap Index and the S&P 500 Completion Index are both up more than 30 percent in 12 months, for the best gains.
To be sure, while acknowledging the internal strength this index shows for the American economy, not all investors believe this trend will continue.
"I’ve never seen the big caps this cheap," said Karen Finerman, President of Metropolitan Capital Advisors and a ‘Fast Money’ trader. “Maybe during the Tech boom when anything without dot-com involved was forgotten."
Finerman is betting valuation and an improving global picture could cause a comeback for the S&P 500, especially considering that a lot of the market’s move over the last one year can be attributed to an improving risk appetite, which sends investors to the higher beta small caps. That will change as the bull market matures, she says.
Either way, the S&P 500 Completion Index deserves its spot on the TV ticker. Maybe we would stop worrying so much.
For the best market insight, catch ‘Fast Money’ each night at 5pm ET on CNBC.
John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team