Small Cap Stocks are Already Outperforming the S&P 500

February 7, 2019, By smallpicksfirm,

So far so good for small caps in 2019.

At the moment, the Russell 2000 is up 13% on the year, outperforming the 10% gains on the Dow Jones Industrial Average (DJIA) and S&P 500.

That’s not a surprise, though.

“The Russell 2000 has been leaving the S&P 500 in the dust over the past four decades during periods of economic turbulence, recessions and financial crises. It managed to outperform the large-stock benchmark by 80 percent in 1979-1983, 50 percent in 1990-1994 and 114 percent in 1994-2014,” notes NASDAQ.

What we’ve seen in 2019 may only be the start of something bigger.

In fact, Kevin O’Leary of Shark Tank, as quoted by CNBC, says that several tailwinds should continue to benefit small cap stocks.

“Tax reforms haven’t had their full effect yet and because the tax code has just been re-written for these all domestic companies. Remember the majority of the sales for the Russell 2000 are all domestic,” O’Leary said on CNBC. “The market here still has the benefits of deregulation and tax reform in a way that no other geography has.”

We must also consider that – most times — the domestic focus of smaller companies makes them a bit less vulnerable to overseas issues, such as trade wars between the U.S. and China, too.  Also weighing on bigger stocks is the strength of the U.S. dollar, which recently hit four-month highs.

How to Trade the Rebound

While the average investor can always go bottom-fishing for oversold small-cap stocks, one of the best ways to diversify is with an ETF, including:

  • The iShares Russell 2000 Growth ETF (IWO)
  • The iShares Core S&P Small Cap ETF (IJR)
  • Or even the Vanguard Small Cap ETF (VB)

What’s nice about ETFs is they allow you to diversify among a greater pool of stocks at less cost.  For example, IWO ETF trades at $190 a share. If I wanted to buy 10 shares, it would cost me $1,900.  That allows me to diversify among 1,251 small cap stocks.

We can assure you that if we were to buy 10 shares of each of the 1,251, it would cost a bit more than $1,900 that we could pay to diversity with IWO.