Why You've Missed Out on the Market's Biggest Gains

Investors buy funds that track the S&P 500 (SNPINDEX: ^GSPC  ) because the index includes 500 of the biggest, best-known companies in the U.S. stock market. Yet at least recently, the best-known stocks in the index actually haven't contributed as much to the market's gains as some of the lesser-known, smaller stocks that barely make their way into the index.

Small is in
Take a look at the following chart, showing the gains in three different stock indexes:

^SPX Chart

S&P 500, S&P 100, and Russell 2000 data by YCharts.

The line in the middle, weighing in with a gain of almost 18%, represents the full S&P 500. Slightly below that is the S&P 100, which includes the 100 biggest stocks in the S&P 500. As you can see, the S&P 100 has underperformed the broader S&P 500 by more than a percentage point, showing that the companies at the smaller end of the large-cap universe have contributed more to the broader index's performance than the top megacaps included in the benchmark.

Moving further still down the size spectrum, the Russell 2000 (RUSSELLINDICES: ^RUT  ) has put in the best performance of all, crushing the megacap S&P 100 by more than five percentage points and topping the S&P 500 by almost four percentage points.

Why are big stocks falling behind?
Typically, small-cap stocks tend to do better during times of economic growth. That's because unlike the largest, most mature companies, small-caps tend to be younger and more nimble in taking advantage of changing conditions and jumping on profitable opportunities. Moreover, precisely because they're smaller, they have a lot further to grow, attracting investors who don't want the limited upside of blue-chip megacap stocks.

On the other hand, large-cap stocks gain in popularity during times of slower growth and recession. Without the massive financial resources that large caps have, smaller companies are much more vulnerable to adverse economic conditions, and although their size can make it easier for them to adapt, they nevertheless face the challenge of surviving through credit crunches and other capital-market disruptions.

How to score better gains
If you think that the bull market has further to go, then investing in smaller stocks can make a big difference in your overall returns. Whether you go with the simple index-tracking investment iShares Russell 2000 (NYSEMKT: IWM  ) or pick individual stocks on your own, adding small-cap exposure to your portfolio can help you appreciate the growth power of up-and-coming companies as they find their market niches and start to prosper.

Small caps aren't the first companies that come to mind when you think about government bailouts, but two small-cap companies with long-term government deals have managed to securing some monstrous, guaranteed profits -- all while limiting any risk exposure they have. We outline how they're taking advantage in our special, 100% free report "Too Small to Fail: 2 Small Caps the Government Won't Let Go Broke." Just click here to get instant access to the names of both companies, and start reaping the profits right alongside them!

Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2536358, ~/Articles/ArticleHandler.aspx, 10/26/2016 7:24:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:39 PM
^GSPC $2139.43 Down -3.73 -0.17%
S&P 500 INDEX CAPS Rating: No stars
^RUT $1204.75 Down -11.35 -0.93%
RUSSELL 2000 STOCK… CAPS Rating: No stars
IWM $119.73 Down -1.20 -0.99%
iShares Russell 20… CAPS Rating: **