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Small Caps Can’t Catch a Break

July 01, 2019

Other than a meager 0.09% excess return during the week ending June 14, small caps have lost to large caps in 7 of the last 8 weeks leading some to ask what it will take for small caps to finally outperform large caps for more than a handful of days. Others have even questioned the sustainability of the market rally if smaller firms are not participating along with their larger peers.

While small caps could certainly see a near-term bounce, we continue to believe that large caps offer the best potential for relative returns over the intermediate period.

What We’ve Seen

  • Over the last year, large caps have returned nearly 9%, while small caps have fallen over 7%. Sector differences, which are significant between the two groups account for only 0.01% of the 16.30% difference. The main driver has been at the security level with all 11 GICS sectors showing large cap names having greater impact than small caps.
  • Looking at an attribution analysis that ranks large cap relative to small cap performance at the single stock level, 24 of the 25 largest positive contributors have been large caps with an average return of over 30%. The spread has been so dramatic that the 24th largest contributor is actually a small cap name down 84% over the last 12 months.

Security Effects Have Driven Large Cap Outperformance

NameSector Effect (%)Security Effect (%)Total Effect (%)
Communication Services0.300.660.96
Consumer Discretionary0.101.952.05
Consumer Staples-0.302.041.74
Health Care0.153.363.51
Information Technology0.802.152.95
Real Estate-0.340.480.14

Source: Bloomberg Finance, L.P., FTSE Russell, as of June 26, 2018 to June 25, 2019. Data displays the drivers of relative returns of large caps defined as the Russell 1000 Index and small caps defined as the Russell 2000 Index over the last year. Past performance is not indicative of future results. One cannot invest directly in an index.

Money in Motion

  • With such sharp underperformance, ETF investors have remained sour on small caps relative to large caps for the better part of 2019 and currently stand at the 9th percentile using data from the last 3 years, which as shown below is the longest stretch of continued lack of interest in this period.
  • On the other hand, large cap flows have shown greater velocity driven primarily by products favored by the trading community. As of June 25, large cap flows sit at the 29th percentile with $3.76 billion of inflows over the trailing 3 months.

Small Cap ETF Flows Remain Depressed

Source: Bloomberg Finance, L.P., as of June 25, 2019. Data represents the daily percentile rank over the last 36-months of 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?

With the macro picture fuzzy and momentum in their favor, large caps will likely remain bid up by investors over the intermediate term unless a material improvement in small cap balance sheets occurs, which seems unlikely.

  • From a technical perspective, a sign of the material weakness for small caps relative to large caps is that the difference between stocks trading above their 200-day moving average in each index stands at 24%, which is one of the widest levels since 2014.
  • Specifically, 64% of large cap stocks are trading above their 200-day moving average, while only 40% of small caps are doing so. In 2014, we saw this difference peak over 30% in both May and June potentially indicating that the gap could widen before it narrows.

The Gap Between Index Members Above their 200-Day Moving Average is Wide

Source: Bloomberg Finance, L.P., FTSE Russell, as of June 25, 2019. 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

  • Relative to long-only strategies, the Direxion Russell Large Over Small ETF [RWLS] offers a more capital efficient structure for investors positioning for continued outperformance of large caps relative small caps.
  • For investors looking for small caps to mean revert in the near-term, the Direxion Russell Small Over Large Cap ETF [RWSL] provides amplified exposure to small caps at the expense of large caps.


  • 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.

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Distributor: Foreside Fund Services, LLC

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