In fact, historical data shows that small-cap stocks have outperformed their large-cap counterparts during three of the past five recessions, while mid-cap stocks have outperformed their large-cap counterparts in each of the past five recessions. A major reason behind this outperformance is due to the flexibility and nimbleness of small and mod-cap companies. These companies are generally able to quickly ramp up headcount and production as the economy improves, which further enables them to take advantage of a growing environment and produce gains in revenue and earnings.
A second force which enables small and mid-caps to outperform large-caps is the inherent performance boost they witness when mergers and acquisitions activity increases as valuations become favorable and larger companies with excess cash on their balance sheets look for ways to expand their businesses. Lastly, small and mid-cap companies generally are riskier than large-caps and therefore witness higher returns and are more susceptible to positive price support in the early stages of an economic recovery.
Some ETFs influenced by this phenomenon include:
- PowerShares Dynamic Small Cap (NYSE:PJM), which is up 27% over the last year.
- Vanguard Small-Cap ETF (NYSE:VBR), which is up nearly 25% over the last year.
- S&P Mid-Cap 400 SPDR ETF (NYSE:MDY), which is up nearly 28% over the last year.
- iShares Russell Midcap Index Fund (NYSE:IWR), which is up nearly 26% over the last year.
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.