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Can Small Caps Continue to Outperform?

Eric Dutram

While large cap stocks have rebounded quite nicely from the initial panic over tapering, small caps have actually done even better as of late. In fact, the small caps, as represented by the popular ETF IWM, have added about 3.6% in the past month, compared to a gain of just under 0.8% for SPY.

This extends the recent streak of outperformance by these pint-sized companies as of late, as IWM has added about 28.8% in the past year, beating out the 24.1% posted by the S&P 500 ETF in the same time frame.

Part of the reason for this relative outperformance has to be the return of the risk on trade lately, but also the focus of small caps compared to their large cap counterparts. Generally speaking, small caps tend to do more business in their home market, and with foreign nations from around the globe facing sluggish conditions, this may be helping small caps to power ahead as well.

However, it is worth pointing out that small caps tend to experience much more volatility than their large cap counterparts, and that the small caps’ outperformance is pretty much a recent phenomenon. The S&P was holding its own—or even beating small caps—for much of 2013 before falling by the wayside once July began.

Given this, the continued outperformance of small caps is by no means assured, especially if more volatility hits the market. Still, with the U.S. arguably leading the way for major economies, pint-sized securities could be the way to go in this type of environment…

But what do you think?

Will small caps continue to outperform, or will large caps steal the show back this earnings season?

Let us know in the comments section below!

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