When To Buy Small Cap Funds
The Russell 2000 is the most widely followed index that tracks small-cap stocks. It includes the 2,000 smallest stocks in the broader Russell 3000 index. Notice in the chart below how the Russell 2000 closely tracked the performance of the large-cap S&P 500 throughout much of the massive market sell-off during the Great Recession that began in late 2007 and went through mid-2009. (The shaded portion of the chart indicates when the U.S. economy was in a recession.)
when to buy small cap funds
However, small-cap stocks again beat large-cap stocks in the subsequent bull market. By the end of 2004, which was still relatively early in this new bull market, the Russell 2000 was handily outperforming the S&P 500.
The bottom line is that small-cap stocks can turbocharge your portfolio. Over the long term, they outperform large-cap stocks. Just look at the comparison of the total returns of the Russell 2000 and S&P 500 since 2000.
Why do small-cap stocks tend to perform so well? For one thing, Wall Street analysts don't follow small-cap stocks as closely as they do large-cap stocks. This allows many of these smaller stocks to quietly achieve success without being overvalued.
You could buy individual small-cap stocks. Keep in mind, though, that they're usually riskier than large-cap stocks. Be sure to research the companies' financial position, management team, growth prospects, and competitive landscape before making a decision.
An easier alternative is to invest in an exchange-traded fund (ETF) that focuses on small-cap stocks. There are several of these ETFs to consider. I think that the Vanguard Small Cap Index Fund ETF (VB 1.34%) especially stands out.
Vanguard is known for its low fees. Its VB small-cap ETF has an expense ratio of only 0.05%. The ETF holds positions in nearly 1,500 small-cap stocks, providing ample diversification. You don't need to have a lot of money to get started with VB, either: Its minimum investment amount is only $1.
The "cap" in "small-cap" is short for "market capitalization." That's the total value of the company, as measured by adding together all of the shares at their current prices. Small-cap companies are those with market capitalizations of between $300 million and $2 billion. The smaller companies just below small-caps are called "micro-caps." Those just above small-caps are called "mid-caps.""}},"@type": "Question","name": "Why would someone invest in a small-cap stock instead of a large-cap stock?","acceptedAnswer": "@type": "Answer","text": "Small-cap stocks may offer more opportunities for investors and traders seeking capital gains. Because they are smaller companies, small-caps have more room to grow. As a company grows, its stock probably will, too. Therefore, if you pick the right company to invest in, you could make more money by holding a small-cap stock than a large-cap stock. However, in the real world, large-cap stocks are typically less risky than small-cap stocks, and they may also issue dividends that boost their total rates of return."]}]}] .cls-1fill:#999.cls-6fill:#6d6e71 Skip to contentThe BalanceSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.BudgetingBudgeting Budgeting Calculator Financial Planning Managing Your Debt Best Budgeting Apps View All InvestingInvesting Find an Advisor Stocks Retirement Planning Cryptocurrency Best Online Stock Brokers Best Investment Apps View All MortgagesMortgages Homeowner Guide First-Time Homebuyers Home Financing Managing Your Loan Mortgage Refinancing Using Your Home Equity Today's Mortgage Rates View All EconomicsEconomics US Economy Economic Terms Unemployment Fiscal Policy Monetary Policy View All BankingBanking Banking Basics Compound Interest Calculator Best Savings Account Interest Rates Best CD Rates Best Banks for Checking Accounts Best Personal Loans Best Auto Loan Rates View All Small BusinessSmall Business Entrepreneurship Business Banking Business Financing Business Taxes Business Tools Becoming an Owner Operations & Success View All Career PlanningCareer Planning Finding a Job Getting a Raise Work Benefits Top Jobs Cover Letters Resumes View All MoreMore Credit Cards Insurance Taxes Credit Reports & Scores Loans Personal Stories About UsAbout Us The Balance Financial Review Board Diversity & Inclusion Pledge View All Follow Us
Budgeting Budgeting Calculator Financial Planning Managing Your Debt Best Budgeting Apps Investing Find an Advisor Stocks Retirement Planning Cryptocurrency Best Online Stock Brokers Best Investment Apps Mortgages Homeowner Guide First-Time Homebuyers Home Financing Managing Your Loan Mortgage Refinancing Using Your Home Equity Today's Mortgage Rates Economics US Economy Economic Terms Unemployment Fiscal Policy Monetary Policy Banking Banking Basics Compound Interest Calculator Best Savings Account Interest Rates Best CD Rates Best Banks for Checking Accounts Best Personal Loans Best Auto Loan Rates Small Business Entrepreneurship Business Banking Business Financing Business Taxes Business Tools Becoming an Owner Operations & Success Career Planning Finding a Job Getting a Raise Work Benefits Top Jobs Cover Letters Resumes More Credit Cards Insurance Taxes Credit Reports & Scores Loans Financial Terms Dictionary About Us The Balance Financial Review Board Diversity & Inclusion Pledge InvestingWhen Is the Best Time to Invest in Small-Cap Stocks?How to Benefit by Investing in Small-Cap Stock FundsByKent ThuneUpdated on April 6, 2022Reviewed byMichael J Boyle Reviewed byMichael J BoyleMichael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics.learn about our financial review boardIn This ArticleView AllIn This ArticleMaximize Returns With Small-Cap Stock FundsHow Small-Cap Stocks Can Beat Large-Cap StocksInvesting In Small-Cap Stock FundsThe Bottom LineFrequently Asked Questions (FAQs) Photo: Anupong Sakoolchai / Moment / Getty Images
The "cap" in "small-cap" is short for "market capitalization." That's the total value of the company, as measured by adding together all of the shares at their current prices. Small-cap companies are those with market capitalizations of between $300 million and $2 billion. The smaller companies just below small-caps are called "micro-caps." Those just above small-caps are called "mid-caps."
Small-cap stocks may offer more opportunities for investors and traders seeking capital gains. Because they are smaller companies, small-caps have more room to grow. As a company grows, its stock probably will, too. Therefore, if you pick the right company to invest in, you could make more money by holding a small-cap stock than a large-cap stock. However, in the real world, large-cap stocks are typically less risky than small-cap stocks, and they may also issue dividends that boost their total rates of return.
There are plenty of other reasons to take a flyer on small caps. Clissold believes they will disproportionately benefit from trends such as deglobalization and a strengthening dollar because small caps tend to be more U.S. focused. And several academic researchers have found that over the very long run, small cap stocks tend to gain more than those of large companies.
Two strategists from Royce Investment Partners believe that now is the right time to consider small-cap stocks. In an article on Wealthmanagement.com, Francis Gannon and Steve Lipper gave six reasons why they believe the current environment is a great time to invest in small-cap stocks. The first reason is that small caps currently have superior valuations compared to large-cap stocks. Another reason to invest in small caps is the fact that small caps have a history of outperformance following periods of high investor anxiety and low-risk tolerance. Small caps have also historically beaten large caps following periods of deep declines. In addition, small caps operate in their own way; meaning there are significant differences between small and large caps in their long-term performance during different market cycles. Gannon and Lipper also mention that small caps are a highly heterogeneous asset class, indicating that there are so many small-cap companies that investors can find stocks in every sector and industry. The sixth and final reason is that investors lose out by waiting to put capital to work. They noted that small-cap recoveries have historically happened very quickly.
"While 2020 was a banner year for small caps, this segment of the market has traded generally sideways for the better half of 2021," says Mike Loewengart, managing director of investment strategy at E-Trade Financial, an Arlington, Virginia-based brokerage company.
"There have been a number of monkey wrenches that have threatened to disrupt a full recovery," Loewengart says. "With prospects of slower growth, small caps could potentially see less robust returns, but that doesn't mean they should be ignored."
Small caps tend to be riskier and generate a bumpier ride for investors, Chan says. When U.S. real GDP growth prospects are declining, it is "generally not a good short-term bet to bet heavily on small caps," he says. 041b061a72