Small Caps Are Still Crushing the S&P 500


Investors in the S&P 500 can't really complain about the solid double-digit percentage gains they've enjoyed so far this year. But compared with the S&P 500's returns, small-cap stocks have provide much stronger profits for investors -- even as many begin to question how much further the long bull market can push higher.

Small-cap superiority
Small-cap stocks have much different characteristics from their larger counterparts. Overall, the stocks that make it into the S&P 500 earn their way by producing monumental growth, demonstrating an ability to become important players, if not outright leaders, in their respective industries.

But by the time a stock actually gets into the S&P 500, much of its growth prospects are behind it. For instance, Facebook went through its most important growth phase before it even traded as a public company. Even now, the social-media company has bounced back from more than a year of underperformance, yet Standard & Poor's still hasn't seen fit to grant Facebook admittance to its benchmark index.

Over the past few months, small-cap stocks have greatly outpaced the S&P 500:

SPY Total Return Price Chart
SPY Total Return Price Chart

Total Return data by YCharts.

What's particularly interesting about this chart is that it covers both the declines in late June, prompted by fears of the Federal Reserve's tapering of quantitative easing, and the subsequent rally as investors downplayed those fears. The SPDR S&P SmallCap 600 ETF beat out both SPDR S&P MidCap 400 ETF and the SPDR S&P 500 both during the downturn and during the subsequent bounce.

Small caps have always been special
But before you dismiss this as simply a quirk of short-term performance, take a look at this longer-term chart.

SPY Total Return Price Chart
SPY Total Return Price Chart

Total Return Price data by YCharts.

Over the past decade, through good times and bad, small- and mid-cap stocks have consistently beaten large caps. Especially since the financial crisis, small caps have taken off, leaving the S&P 500 behind.

What's behind small-cap success?
In the big picture, the success of small-cap stocks is a testament to the American model of capitalism. Large companies wield a great deal of power, but they nevertheless have proved unable to hold back up-and-coming competitors that have innovative new ideas. New businesses continually disrupt existing industries, rendering even the oldest and best-established companies obsolete with their advances. As long as America values entrepreneurial spirit, small-cap stocks will continue to have the potential to produce the lucrative returns that their investors have enjoyed for decades.

Today's unknown small caps will grow into the great companies that most deserve your long-term investing capital. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

The article Small Caps Are Still Crushing the S&P 500 originally appeared on

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published