Time to Tilt Away from Mega Caps?

By Norman Conley via Iris.xyz

The last several years have been more than a little challenging for investors in smaller companies.

Between 2014 and 2018, the small-cap Russell 2000’s annualized total return of 4.3% lagged the large-cap Russell 1000 by almost 3% per year. The difference is largely attributable to the recent dramatic outperformance by mega-cap growth stocks, sometimes collectively referred to as the “FANG” (i.e. Facebook, Apple, Netflix, Google) trade.

It appears that this dynamic may be changing. As evidence, we have included this chart, which details relative performance between the traditional capitalization-weighted S&P 500 Index and the equal-weighted S&P 500.

At risk of stating the obvious, the former is dominated by the largest companies. The latter is simply an equally-weighted basket of 500 stocks, without regard to their market capitalization. When the green line is moving up, the equal-weighted S&P 500 is outperforming the cap-weighted S&P 500. When the green line is moving down, the reverse is true. Stated another way, when smaller-cap stocks are outperforming their large-cap brethren, we can expect to see the equal-weighted S&P 500 outperform the capitalization-weighted S&P 500 Index.

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