Small capitalization stocks and category-related exchange traded funds are outperforming in the U.S. markets.
The S&P SmallCap 600 Index has outperformed the benchmark S&P 500 Index of large-cap companies by 9.5% from February through May, marking an outperformance at the three-month premium level last seen since May 2002, according to a S&P Dow Jones Indices note.
The SPDR S&P 600 Small Cap ETF (NYSEARCA:SLY), iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and Vanguard S&P Small-Cap 600 ETF (NYSEArca: VIOO), which all track the S&P SmallCap 600 Index, have increased 10.4% over the past three months, whereas the S&P 500 gained 2.6%. Year-to-date, the small-cap ETFs were up 10.2%, compared to the S&P 500’s 3.6% gain.
All 11 small-cap GICS sectors advanced over May, the first time all 11 gained in a calendar month since December 2016. Among the leaders in May, health care increased 9.3%, information technology rose 7.9% and real estate added 7.9%.
A Great Time for Small-Caps
Jodie Gunzberg, Managing Director, Head of U.S. Equities, S&P Dow Jones Indices, pointed to a number of supporting factors that have helped small-caps outperform and may continue to bolster this market category ahead. Gunzberg argued that the small-cap category enjoyed healthy deal making, increased expectations for acquisition of smaller companies, stronger innovation of among health care small-caps.
Furthermore, the current economic backdrop is aiding small-cap consumer staples over their large-cap counterpart. Smaller consumer staples companies historically do better on GDP growth, rising on average 5.9% per 1% of growth, whereas large caps rise just 4.0% per 1% of growth.
The Federal Reserve’s tighter monetary policy may also help support the small-cap outlook over its peers. Rising rates especially help small-cap consumer staples more than large-caps – for every 100 basis point rate rise, small-cap consumer staples rose 7.2% on average historically, compared to the average 4.0% gain among large-cap consumer staples companies during a period of 100 basis point rate increase.
“As with all sectors, it is important to drill down further into Industry Groups, and in some cases even into the more granular industries and sub-industries for clarity about where the performance and potential opportunities exist within a sector,” Gunzberg said. “The flexibility to change prices of goods quickly is a key to performance in this market, especially if inflation might be a concern.”
For more information on the small capitalization segment, visit our small-cap category.