In the investing world things can turn on a dime. Small-cap stocks have certainly turned it around in 2016, and in a swift and dramatic fashion.
Over the last few years, small-caps have struggled relative to their large-cap stock counterparts. But the tables were turned following the U.S. presidential election on November 8th. The broad markets rose and the small-cap premium, as measured by the return difference between the Russell 2000 (small-caps) and the Russell 1000 (large-caps), was 8 percentage points as of November 30th.
This upward move, in a very short period of time, catapulted small-cap stocks to an 8% lead over large-cap stocks for 2016, and for a full one-year period by 4 percentage points.
Small company stocks have historically outperformed large company stocks, when looking at average returns over the long-term. But that long-term size premium will include periods of both strong and weak relative performance.
It may be tempting to try and enhance returns by timing when small-caps are going to outperform. But the most beneficial results usually occur in a swift and unpredictable manner.
We tilt our stock portfolios to capture the premiums associated with the size, value, and profitability dimensions of expected returns. We understand that there is no guarantee that these premiums will always be positive, but by maintaining constant exposure to the dimensions we increase our odds of enhancing returns over the long-term.
Source: Dimensional Fund Advisors