"Chart of the Month" from HQ Trust: The big difference between small-cap indices
Of course, a balanced portfolio should also include the shares of smaller companies. In the long term, small caps, in which US stocks also account for the largest weighting, have ultimately outperformed large corporations in terms of returns. An analysis by Pascal Kielkopf shows which US small cap index is the better one.
In his new study, the capital market analyst from HQ Trust compares the performance of the well-known US small-cap indices Russell 2000 and the S&P 600 since 2001. It is immediately apparent that the performance of the S&P 600 differs significantly from that of the Russell 2000. This is due to significant differences in the index construction and consequently also in its composition:
- "The S&P 600 places more emphasis on quality. Before a company is included in the index, it must have achieved positive earnings for 4 consecutive quarters. There is no such earnings screening in the Russell 2000."
- "There is also a difference in the frequency of index adjustments. While the Russell 2000 is only reviewed once a year, the S&P 600 is reviewed quarterly."
- "The Russell 2000 is more broadly diversified: as the name suggests, the index is made up of 2000 companies. The S&P only has 600 stocks."
Pascal Kielkopf's look at the long-term returns of the two indices and the characteristics of the four important factors of value, growth, quality and volatility compared to an investment in the broad market shows just how significant these differences are.
- "Since 2001, the S&P 600 has achieved an average return of 8.4%. The Russell 2000 lags far behind at 6.9%."
- "These one and a half percentage points make a big difference in the long term. 100 dollars would have turned into around 642 for the S&P, but only 461 for the Russell."
A look at the individual factors shows where these differences come from.
- "Basically, the factors move in the same direction: Small-cap indices have a stronger value bias and a correspondingly weaker growth bias. In terms of volatility and quality, they lag behind the broad market."
- "However, the differences are also immediately apparent when screening earnings: The Russell is significantly behind the S&P in terms of quality, which means its volatility is also higher."
- "As the Russell also contains many (still) unprofitable growth companies, its value orientation is significantly lower - the S&P, on the other hand, contains fewer growth stocks."
“Chart of the Month” from HQ Trust: Equities - Where the little ones have beaten the big ones
Big beats small: the past few years can be quickly summarized from an investor's point of view. On average, shares with a high market capitalization were more in demand than small caps. However, if you take a look at the individual sectors with Pascal Kielkopf, you might be surprised at how often the small stocks outperformed the large ones.
The capital market analyst from HQ Trust examined the returns of the 11 sectoral MSCI ACWI small and large cap indices. Small caps are often less diversified in their business activities and are more dependent on the success of a few products or services, but when they are successful they also grow much faster. As a result, they are also more exposed to economic fluctuations.
In order to compensate them for the risk they take on, investors therefore expect a higher return from them. Small caps have clearly outperformed over the last 100 years. And what about the past few years?
- "Over the past 10 years, small-cap stocks have not outperformed the broad global equity market."
- "However, this cannot be explained by the fact that small caps have performed poorly: since June 2010, they have achieved a gain of 188% or 7.8% per year."
- "However, large caps were able to gain even more, mainly due to the enormous growth of big tech stocks. They achieved growth of 218 % or 8.6 % p.a."
However, if you look one level deeper, industry-specific trends play the decisive role - and the picture of small versus large sometimes looks very different:
- "Although large stocks were ahead overall, small caps outperformed in 6 out of 11 industries since 2010."
- "Utilities stood out in particular: In a wave of consolidation, many smaller utilities were taken over in the last decade, from which their shares benefited greatly."
- "But small stocks also performed better in the materials, industrials, consumer staples, communications and consumer discretionary sectors."
- "Small energy stocks, on the other hand, lagged the furthest behind: small companies suffered significantly more from the long period of low energy prices. Since these have risen again since 2020, small companies have also been able to catch up."
Written by Pascal Kielkopf, Capital Market Analyst at HQ Trust
