Small Cap, Mid Cap, Large Cap Stocks, Which Group Has Performed Better
Investors seeking to outperform the market might ask themselves which group of stocks; small cap, mid cap or large cap, could give them a better chance to beat the market. Concerning the dilemma, which is a better stock picking strategy, small cap, mid cap or large cap? I have gathered historical results for the three strategies. The table below shows the average annual total return including dividends of the three indexes which represent the three categories, starting in different periods until now. The three indexes are:
Small Cap - S&P SmallCap 600
Mid Cap - S&P MidCap 400
Large Cap - S&P 500
Data: Portfolio123
Overall the periods, except the last three years, the small-cap and the mid-cap indexes have given a significantly higher return than the large cap index S&P 500. What's more, small-cap has outperformed mid-cap stocks in most of the periods. However, the difference has not as big as compared to the large cap stocks. The advantage of small-cap stocks has been most noticeable for the period starting 17 years ago. Over that period the S&P SmallCap 600 index has given an average annual return including dividends of 8.87%, while the S&P MidCap 400 index has given an average annual return of 8.70%, and the S&P 500 index has given an average annual return of only 2.84%.
Some investors might argue that although small cap stocks can outperform large cap stocks, they are riskier. To answer this dilemma, I have calculated the maximum drawdown of the three indexes over different periods, as shown in the table below:
Data: Portfolio123
Although the maximum drawdown of the small cap and the mid-cap indexes are higher than the maximum drawdown of the large-cap index, the difference is very small, which does not indicate a significantly greater risk.
Conclusion
There is a better chance to outperform the market with small-cap and the mid-cap stocks than with large cap stocks.
Disclosure: None.