A strong October month for equities bodes well for small-cap stocks and related exchange traded funds as we enter a seasonally strong period for smaller companies.
Over October, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P SmallCap 600, rose 6.0%; Vanguard Small Cap ETF (NYSEArca: VB), which follows the CRSP US Small Cap Index, gained 5.3%; the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the Russell 2000 Index, increased 5.8%; and Schwab U.S. Small-Cap ETF (NYSEArca: SCHA), which tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, returned 5.5%.
After large October gains, small-cap stocks typically generated outsized returns in the following November and December months, according to KimbleChartingSolutions.
Since 1991, small-cap stocks have turned positive 85.7% of the time over the November and December months, rising 6.8% on average, after the Russell 2000 registered a 4% gain in October. The Russell 2000 Index rose 5.3% last month.
Source: Kimble Charting Solutions
Small-capitalization stocks have also typically outperformed during the winter months. According to Ryan Detrick, a former portfolio manager and market strategist, the Russell 2000 Index typically outpaced the S&P 500 from December through February – some may know the outperformance phenomenon as the so-called January effect where U.S. small-caps typically run ahead of larger stocks.
Small-cap stocks typically include those with market capitalization between $300 million and $2 billion, covering a sliver of the investable U.S. equity universe – the Russell 2000 makes up about 10% of the total market capitalization of the Russel 3000, writes Kate Stalter for U.S.News.
Long-term historical data has shown that the smallest 10% of companies delivered an annualized return of about 13.5% between 1928 and 2014, outperforming the largest 10% of firms, which realized a 10% return, according to Mark Hebner, president and founder of Index Fund Advisors.
“Because of the faster growth rate, small caps tend to trade at a higher price-earnings multiple than larger caps, and this often makes small caps more volatile,” Gary Bradshaw, portfolio manager at the Hodges Small Cap Fund, told USNews. “But at the same time, this is a catalyst for small-cap outperformance.”
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article.