The Spotlight Blog

Livin’ Large

Download pdf

The recent outperformance of large caps relative to small caps continues to gather attention as larger companies   have beaten smaller ones by north of 12% over the last 12 months and nearly 4% annualized over the last 36 months. Our research shows that these pairs go through considerable periods of varying performance and today’s level of outperformance by large caps has occurred in the past.

Looking ahead, we continue to favor large caps over small caps thanks to large caps being less leveraged and are in a better position to service their debt even if they are trading at relatively high multiples compared to small caps.

What We’ve Seen

  • The over 12% outperformance is the highest in well over a decade and in the 93rd percentile during that period. Long- term data shows that there are instances when both the magnitude and duration of relative returns can favor large caps for some time. Looking back to 1979, the current 36-month spread between large caps and small caps is in the 80th percentile, which is certainly tilted to large caps, but far from the extremes one would believe to be the case when only looking at the past 10 years of data.
  • However, 36-month performance paints a different picture as the long-term performance spread is only in the 30th percentile. This may indicate that while the last year saw large caps rip considerably higher, it has not yet pushed a medium-term measure to extremes. In fact, rolling 36-month performance was much greater than it is today for a better part of the 1980s and 1990s.


Rolling 12-Month Current Rolling 36-Month Current
Since July 2009 12.37% Since July 2009 3.90%
Percentile Rank 93% Percentile Rank 80%
Since January 1979 12.37% Since January 1979 3.90%
Percentile Rank 75% Percentile Rank 30%

Source: Bloomberg Finance, L.P., FTSE Russell, as of July 30, 2019. Data displays the current spread and the percentile rank of relative returns of large caps defined as the Russell 1000 Index and small caps defined as the Russell 2000 Index. Past performance is not indicative of future results. One cannot invest directly in an index.

Money in Motion

As has been the case of late, ETF investors are following performance when it comes to allocating their equity assets driving $8.79 billion to large caps and $1.49 billion to small caps in 2019.

  • Over the last 12 months, large caps took in $32.11 billion, while small caps saw $8.14 billion of inflows. Outside of a few isolated periods, investors have generally favored Large Cap ETFs this year, which differs from 2018 where there were more mixed flows, especially at the beginning and end of the year.
  • Rolling 3-month flows see relative flows in the 83rd percentile in favor of large caps, but has come off the 92nd percentile seen on July 23, which rivaled the levels witnessed in February 2019.


Source: Bloomberg Finance, L.P., as of July 30, 2019. Data represents the daily percentile rank over the last 36-months of the difference between the rolling 3-month net flows of U.S.-listed U.S. Large Cap ETFs and U.S. Small Cap ETFs specifically targeting exposure to U.S. Large Cap and U.S. Small Cap stocks, respectively.

What’s Next?

Perhaps more important than performance is the fact that the relative valuations between large caps and small caps does show that large caps are trading at higher than average relative valuations, but again, this does not make the case that the recent large cap outperformance has pushed multiples to unsustainable levels. Comparing standardized valuation data beginning in 1995, large caps are trading at extended valuations versus small caps, but are far from the levels reached in the late 1990s.

  • An argument for small caps is that they may offer outperformance in the event of a valuation-led market selloff since large caps have seen their multiples expand to a greater extent.
  • Even so, large caps have considerably better ability to service the increase in debt loads that they have accumulated, while small caps do not, furthering the case that the setup remains more favorable for companies higher up the cap spectrum.
  • We continue to keep an eye on earnings results, as roughly 50% of the Russell 1000 has reported, and roughly 34% of the Russell 2000 has reported. In terms of results relative to expectations, while bottom-line surprise has been comparable for large caps (~5.25%) and small caps (~6.67%), top-line results have not been encouraging for small caps. Led by the significant misses across the Financials sector among small caps, the group has missed sales expectations by over 7%. Meanwhile, large caps have largely been in-line to positive beats, relative to expectations.


Source: Bloomberg Finance, L.P., FTSE Russell, as of July 30, 2019. Data represents the standardized relative valuations using Price-to-Sales of large cap defined as the Russell 1000 Index and small cap defined as the Russell 2000 Index. One cannot invest directly in an index.

Implementation Ideas



  • Russell 1000® Index: The Russell 1000 Index consists of the largest 1,000 companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. companies.
  • Russell 2000® Index: The Russell 2000 Index is comprised of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization

Direxion Relative Weight ETF Risks – Investing involves risk including possible loss of principal. The Funds’ investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in or shorting securities or other investments. Investing in, and/or having exposure to, small and/or mid-capitalization securities involves greater risks and the possibility of greater price volatility than investing in larger, more-established companies. There is no guarantee that the returns on the Funds’ long or short positions will produce high, or even positive returns and a Fund could lose money if either or both of the Fund’s long and short positions produce negative returns. Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.

Distributor: Foreside Fund Services, LLC