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Trader Debate: Small Caps vs. Large Caps

Lawrence Lewitinn
Talking Numbers
Trader Debate: Small Caps vs. Large Caps

Are small cap stocks better than large cap stocks? We talk numbers with expert two traders.

In some ways, small cap stocks are like last year's Detroit Tigers. Though not as well capitalized as the New York Yankees, the Tigers nonetheless able to sweep their richer rivals in the American League Championships. (To be sure, Detroit eventually went on to lose to Silicon Valley's home team, the San Francisco Giants.)

So, while everyone’s talking about the large cap S&P 500 index hitting record highs, there’s another index that’s hitting record highs, too: the small cap Russell 2000, which broke the 1000 level this past Friday. And, the Russell 2000 is sweeping the S&P 500 in returns any way you slice it.

Though the two are highly correlated (with a coefficient of 0.915), returns have been more favorable for the Russell 2000 over various terms:

Returns over time (as of July 10, 2013) S&P 500 Russell 2000
1 week 2.3% 3.0%
1 month 0.6% 2.8%
Year-to-date 15.9% 20.1%
1 year 23.2% 28.3%
5 years 31.9% 52.2%
10 years 68.2% 115.3%
20 years 268.1% 335.8%

“Here’s why I think that trend will continue,” says CNBC contributor Steve Cortes, Founder of Veracruz TJM. “The small caps tend to be more domestic. The S&P is dominated by the big, mega-cap multinational companies that are extremely global.”

With more global economic uncertainty, Cortes thinks the mostly American-based revenues of small cap stocks will serve as a safe harbor for their investors.

“This is really reflective and emblematic of US strength relative to the rest of the world,” says Cortes. “I believe this will persist.”

But do the charts back up the fundamental argument? Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson takes a look at the Russell 2000’s charts.

To see Ross’ chart on the Russell 2000 and to hear more of Cortes’ analysis, watch the video above and decide for yourself if small caps are the way to go.