Are Small-Cap Stocks Back In The Game?

September 07, 2012

It seems small-cap stocks are not going to miss the boat twice.

When the stock market was rallying earlier this year, IndexUniverse Analyst Ugo Egbunike noticed the rally rested almost entirely on the backs of the large-caps. Using Vanguard ETFs, he showed that the large-caps outperformed their smaller peers by about 7 percent over the 12 months ending April 2012.

Under normal market conditions, small-caps should outperform large-caps when the economy is doing well and underperform them when the economy is doing poorly.

Indeed, small-cap stock performance is generally a good indicator of economy strength, so the segment’s underperformance earlier this year was troubling.

Recently, however, small-caps have been keeping pace with—and even outperforming—their large-cap brethren as the stock market has rallied.

Over the past month, the Schwab U.S. Small-Cap ETF (NYSEArca: SCHA) has returned almost double the performance of the Schwab U.S. Large-Cap ETF (NYSEArca: SCHX), while the Schwab U.S. Mid-Cap ETF (NYSEArca: SCHM) is in between the two.

1-mp performance: SCHX vs. SCHM vs. SCHA

Even when that time period is extended to cover the whole past year, the recent small-cap rally has allowed small-caps to hold their own.

2-year performance: SCHZ vs. SCHM vs. SCHA

Whether the market continues to rally, it’s good to see small-caps acting like small-caps again.

The Fed is meeting in just five days to discuss whether to further stimulate the U.S. economy—if you’re predicting good news, now might be a very good time to increase your small-cap allocation.

At the time this article was written, the author held a position in SCHA. Contact Carolyn Hill at [email protected].

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