Small-Cap, Mid-Cap Or Large-Cap Stocks? - Part 2

by: Arie Goren

In my previous post (here), I compared the performance of the different groups of American stocks according to their market cap size in the current year. In this study I compare the performance of the same groups of stocks during the last twelve years.

An investor in the American stock market trying to outperform the overall market by stocks or fund picking would usually have to decide on what size of companies to invest in. When talking about size we usually mean the market-cap: the number of shares outstanding of a company multiplied by the share price. Big companies tend to be less risky than small companies. But smaller companies can often offer more growth potential.

While there is no official breakdown, the division between the large, medium and small cap is approximately as follows:

  • Large-cap: $10 billion and greater
  • Mid-cap: $1 billion-$10 billion
  • Small-cap: $100 million-$1 billion

In addition to the returns by price appreciation, I also looked into the dividends contribution to the total returns and calculated the Sharpe ratio. The Sharpe ratio is a very important indicator to the reward to risk ratio. Following is the definition of "Sharpe Ratio" by Investopedia (here):

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

Obviously, past behavior is not necessarily expected to repeat itself in the future, but nevertheless, studying past performance helps us identify developing trends.

I have chosen the four well known stock indexes of Standard & Poor's in order to identify the group of stocks according to their size. The four stock indexes are as follows:

S&P SmallCap 600

Description from Standard & Poor's:

The S&P SmallCap 600 covers approximately 3% of the domestic equities market. Measuring the small cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable.

S&P MidCap 400

Description from Standard & Poor's:

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity market, and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis.

S&P 500 Index

Description from Standard & Poor's:

Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes 500 leading companies in leading industries of the U.S. economy. Although the S&P 500® focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. S&P 500 is part of a series of S&P U.S. indices that can be used as building blocks for portfolio construction.

S&P 100 Index

Description from Standard & Poor's:

The S&P 100 Index, a sub-set of the S&P 500®, measures the performance of large cap companies in the United States. Known by its ticker symbol, OEX, the index is comprised of 100 major, blue chip companies across multiple industry groups. The primary criterion for index inclusion is the availability of individual stock options for each constituent.

In order to compare the different index's performance, I used the most traded ETFs corresponding to the four S&P indexes, as shown in the table below.




ETF Name




S&P SmallCap 600

iShares Core S&P Small-Cap ETF




S&P MidCap 400

SPDR S&P MidCap 400




S&P 500

SPDR S&P 500




S&P 100

iShares S&P 100 Index


The table and the charts below present the total returns and the Compound Annual Growth Rate (CAGR) between December 29, 2000 and December 14, 2012 for the four ETFs. The returns without dividends and with dividends are shown separately, in order to emphasize the importance of the dividend yield. All funds' quotes and adjusted for dividends quotes were extracted from Yahoo Finance.

The table clearly shows that the small-cap and the mid-cap groups have been by far the best performer in the last twelve years. The total return with dividends of the small-cap group has been 121.71% (CAGR 6.91%), without the dividends the total return would be 102.13% (CAGR 6.08%). The return of the mid-cap group has been not far from the small-cap group, with a total return with dividends of 112.62% (CAGR 6.53%), without the dividends the total return would be 89.15% (CAGR 5.49%). While the return of the small-cap and the mid-cap groups have been better than the average yield of the 30-year U.S. Treasury, which was 4.51% for this period, the large-cap group and the mega-cap group, have caused investors in these groups great disappointments. The total return with dividends of the large-cap group has been 29.16% (CAGR 2.17%), without the dividends the total return would be only 3.71% (CAGR 0.31%). The total return with dividends of the mega-cap group has been negative -1.55% (CAGR -0.13%), without the dividends the total return would be even worse -9.52 (CAGR -0.84%).

The table and the chart below present the Sharpe ratio for the four ETFs where the 30-year U.S. Treasury bond has been taken as the risk free rate in the Sharpe ratio calculations. I have also calculated the adjusted Sharpe ratio, in this case ignoring the risk free rate.

In general, the Sharpe ratio ranking was similar to the total return ranking. The negative Sharpe ratio for the large-cap group and the mega-cap group emphasize the fact that in terms of reward to risk ratio, investment in these groups of stocks has been extremely non-profitable in the last twelve years.


It is well known that the last twelve years were not easy ones for investors in the stock market. The volatility has been very high, and there were two long severe bear markets, when the S&P 500 Index suffered a decline of 50.5% between its highest value on March 24, 2000 to its lowest value on October 31, 2002, and another decline of 57.7% between its highest value on October 31, 2007 to its lowest value on March 31, 2009.

Nevertheless, investing in small-cap and mid-cap groups of stocks in the last twelve years has given better returns than the average yield of the 30-year U.S. Treasury. Will this trend continue in the following years? It is yet difficult to tell, especially since this year, the large-cap stocks have been the clear winners among the American stocks. Maybe due to the global financial crisis, investors have been less prompt to invest in small size companies, which are considered riskier. It is most probable that if the world economy will turn to fast growth again, the small size stocks will outperform the general market again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.