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Small and Micro-cap Securities versus Mega-caps.

Updated: Jul 14, 2022

Capitalization in the U.S. equity markets has become extremely concentrated. Put simply, a small number of Mega-cap companies account for a large portion of the total market. Currently at the time of this writing, the top 10 companies by weighting in the S&P 500 are worth approximately $9.35 trillion dollars. These top 10, including Apple, Microsoft, Amazon, and Google make up about 30% of the S&P 500. The Russell 2000 Index, made up of roughly 2000 companies has a total market capitalization of $3 trillion, 1/3 of the value of these 10 S&P stocks. In other words, these ten companies are 3 times the value of the entire Russell 2000 Index. In number of companies, the mass of distribution is in much smaller capitalization. While the top 10 in the S&P 500 have created tremendous value and wealth for their customers, founders, employees, and investors, there are many opportunities in the overlooked micro and small cap spectrum.

When it comes to defining small-cap stocks the parameters have changed over the years. The Russell 2000 Small Cap Index had a market cap range of $240 million to $6.4 billion as of the June 24, 2022 reconstitution. The S&P Smallcap 600 ranged from $123 million to $10 billion. The Russell Microcap Index ranges from $30 million to $4.52 billion. As can be seen by the chart below small cap stocks have outperformed large cap stocks over long periods of time, however these higher returns do come with higher volatility as measured by standard deviation.

Chart 1: Cumulative Returns of Large and Small Cap Stocks, Bonds, and Inflation Since 1926

Source: GROW Funds, Ibbotson, Roger

The long-term cumulative performance of various asset classes is shown in Chart 1 as of May 2022. For simplicity, we tracked performance of Small and Large-cap stocks, 20-year U.S. Government bonds, and the Inflation rate. As has been well documented, small-cap stocks generally outperform other assets. Within equities, the smaller the stocks, the better the performance as demonstrated by Chart 1. Outperformance may be explained by the fact that these companies are relatively underfollowed, may be growing faster due to a smaller base, have pure play business models, and may become acquisition targets for larger companies. Others would argue that they simply have higher risk.

Chart 2: Small-Cap Performance Cycles Relative to Large-Cap, 1926-2022

Source: GROW Funds, Ibbotson, Roger

Interestingly, outperformance from small-cap stocks tends to happen in cycles. Chart 2 shows the relative performance of the small-cap and large-cap markets since 1926. As you can see, there have been a number of cycles in which small-cap has outperformed. For example, from 1975-1983 the annualized return for small-cap was 38.37% which outperformed the S&P 500 by 21.6%. The aforementioned cycles and the associated returns are shown on Table 1.

Table 1

Source: GROW Funds, Ibbotson, Roger


GROW Funds, Ibbotson, Roger. Stocks, Bonds, Bills, and Inflation (SBBI): 2021 Summary Edition, Research Foundation Books, 2021

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Small and Micro-Cap Securities Versus Mega-cap
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