by Qontigo
Focus on US Small Caps:
- Small cap stocks have substantially lagged their large-cap peers this year
- Average daily volume down for small caps, but up for large caps
- Large shift in small cap sectors, small shift in large cap
Small cap stocks have substantially lagged their large-cap peers this year
With the US market strength driven by the “Magnificent Seven,” the largest-of-the-large technology-related names, the STOXX® World US Small Cap Index has substantially lagged, as we noted in our comments two weeks ago. This week we will dive a little deeper into some of the characteristics and return drivers of US Small Cap stocks versus their larger counterparts.
Most of the underperformance of small cap came in the March-June period. After a brief recovery period for small cap, large cap dominance once again took over in August.
The following chart is not published with the Equity Risk Monitors but is available upon request:
Average daily volume down for small caps, but up for large caps
We note some considerable differences between small and large stocks in the US, starting with average daily trading volume.
Average daily trading volume for both size segments has, of course, experienced the usual summer lull. But where the STOXX® US Index volume ended last week almost 13% higher than it was a year ago (in line with the12-month return of 11.6%), volume for the STOXX US Small Cap Index was about 2% lower than a year ago, despite the index increase over that time period of over 2%. The difference may be small but illustrates the continued preference of larger over smaller stocks in the US.
See charts from the US Small Cap and US Equity Risk Monitors for September 8, 2023:
Large shift in small cap sectors, small shift in large cap
Despite the dominance of a few sectors driving returns for large cap, sector weights and risk contributions did not change very much over the past year. In contrast, the shift in sector representation has been far more dramatic in US Small Cap.
US Large Cap continues to be dominated by the information Technology sector, which accounts for 28% of the weight and more than 38% of the risk. Changes in weight over the past year have been relatively small, while Technology’s risk contribution has jumped much more than its weight, drawing from Health Care, where risk has fallen to less than what would be expected given the weight.
In US Small Cap, sector weights and contributions to risk are more evenly distributed (and so are their contributions to index returns), with the highest-weight sector, Industrials, at 19%, and the biggest difference between weight and percent of risk in Financials (15.5% weight and 18.2% risk contribution) and Health Care (12.2% weight and 9.9% risk contribution). Changes from a year ago have been much bigger than in large cap. Health Care’s weight was down 1.7%, but its risk contribution fell by almost 5%. Financials’ weight was unchanged, but its risk has soared, up about 5.5% since last year.
Investors focused on sector allocations, especially in US small cap, will want to take note of these changes, especially the changes in risk, since that will impact the overall active risk even without any rebalancing.
See charts from the US Small Cap and US Equity Risk Monitors for September 8, 2023:
