Based on this historical picture, we see:
• Six Periods of Sustained Small-Cap Outperformance: There have been six sustained periods (in yellow)
when small caps outperformed large caps. On average, these periods lasted slightly more than seven years.
The current period has lasted approximately 13 years—nearly twice as long as the average going back
about 88 years.
One conclusion resulting from analyzing this chart would be to shift U.S. equity allocations from small caps to large caps. But many will not want to eliminate small-cap exposure entirely, so I believe it is important to consider strategies that incorporate a process to manage the valuation risks building up in this asset class.
Dispersions in Sector Performance
The WisdomTree SmallCap Earnings Index was up more than 34% for the prior year,2 and the WisdomTree SmallCap Dividend Index was up nearly 28% for the same period. Both small-cap Indexes have therefore delivered large returns this year. Driving those returns:
• For the WisdomTree SmallCap Earnings Index: Consumer Discretionary and Industrials were the leading
sectors, with returns of greater than 40% over the period. Health Care and Utilities, on the other hand,
delivered returns of below 20%.
• For the WisdomTree SmallCap Dividend Index: Consumer Discretionary and Industrials were also the
leading sectors for this Index, each with returns above 40% over the same period. However, the group of
sectors with returns below 20% over the period was a bit broader, and in addition to Utilities included both
Materials and Energy.
There was quite a dispersion in small-cap equity returns on a sector basis over this period—something could indicate an opportunity for a relative value rebalancing process to add value and take some chips off the table in sectors that have really run the most.
Past performance is not indicative of future results.