Posted on Tuesday, July 31, 2018

As the S&P 500 Index and Dow have suffered in recent weeks, small-cap stocks have been much less affected by turmoil in the markets. Year-to-date through the end of June 2018, the Russell 2000 Index is up 6.5%, compared to a 1.6% gain for the S&P 500.

The three top-performing U.S. diversified stock ETFs for the month ending June 13 were all small-cap stock funds. Investors Business Daily reported that small-cap growth ETFs occupied the #1, #3, and #6 positions in year-to-date performance as of May 30. And more money flowed into small-cap ETFs in May 2018, $7.5 billion, than any other month since November 2016.

Investors may be gravitating towards small-caps to seek refuge from multi-national trade wars that affect many large companies. A rising dollar also works in favor of small domestic stocks, and lower tax rates may also create opportunities for many companies. Of course, less favorable treatment of interest expense will not help highly-leveraged businesses, but our bias against over-leverage helps us to avoid that trap.

Over time, of course, small-caps, large-caps, and international stocks will all see periods of outperformance and underperformance, often with significant enough non-correlation to warrant being fully invested in each segment. Whether or not small companies will continue to perform well, our focus on well-managed businesses and mispricing by the market should continue to allow us to deliver solid results in our investment choices.

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 - DOUG GERLACH