Small-cap stocks delivering the biggest returns
But the superior performance during a strengthening economy can also lead to a bigger drop when the economy sours.
The Associated Press
NEW YORK — The biggest returns this year have come from the smallest stocks. Small- and mid-cap stocks have dominated their larger peers over much of the current bull market, which began in 2009.
Consider mutual funds that invest in high-growth stocks. Those that focus on small stocks are up about 21 percent in 2013, according to Morningstar. That beats the 15 percent return for large-cap growth stock funds over the same time.
Their strong performance also means that small-cap stocks no longer look like bargains. Prices for stocks in the Standard & Poor’s 600 index of small stocks are trading at an average of 20 times their earnings per share over the last 12 months, according to data provider FactSet.
That’s higher than the index’s average price-earnings ratio of 16 times over the last five years.
Although small-cap stock funds often do better than large-cap funds when the economy’s healthy, they can also fall faster when conditions are souring.
When markets flailed in the third quarter of 2011 small-cap growth stock funds lost an average 22 percent.
That was a steeper drop than the 16 percent loss for large-cap growth funds.