Small caps outperform large-caps
Not as often covered by the press, small-caps are often overlooked by investors. They are not as well-known as their large-caps neighbors and are often deemed as risky.
Large-caps are listed in the famous S&P 500 index which is the most famous stock index in the world and the standard performance benchmark for portfolio managers.
Small-caps also have their own index, the S&P 600. As defined by the S&P 600 index they are stocks with a valuation between $85 million and $4.3 billion.
Another well-known small-caps index is the Russell 2000 a subset of the Russell 3000 index which comprises the top 3000 stocks in the US stock market.
Over the last five years the small-caps index S&P 600 performed better than the S&P 500. On average the former rose 12.98% annually while the latter only rose by 11.66%.
Due to their size small-caps have more room to grow and are more nimble to make the necessary changes in their strategy and adapt to challenging economic conditions.
The number of analysts covering S&P 600 companies is low compared to those covering the ones in the S&P 500. Less light is shed on their financials, strategy and results and thus they offer more reward potential.
Over a sample of 30 companies in each index the average number of analyst opinion given during the current month is 24 for S&P 500 companies while only 6 for S&P 600 stocks.
Small-caps are not as well researched as their bigger counter-parts and might effectively be big-caps in the making.
One can invest in such a performance by buying ETFs covering small-caps or buying a portfolio of companies listed in the S&P 600 index.
One of the index funds available is the SPDR (SLY) which boasts a 12.73% after taxes average annual performance.
With higher rewards come higher risks. Volatility is higher in the S&P 600 index with a standard deviation of 2.53% against 1.93% for the S&P 500.
Otherwise risks are relatively low. Shares listed in the S&P 600 are required to have adequate liquidity. The index as a whole is also well diversified.
The S&P 500 and its small-caps equivalent are both well diversified but not in exactly the same way. The former is dominated by the IT, financials and health care sectors which constitutes more than 50% of is weight. the latter has the financials, IT and industrials as its top three.