Still think the S&P 500's so-called Magnificent Seven are the only stocks worth owning? You're missing out on a below-the-radar rally in smaller stocks.
Eleven stocks in the S&P 1500, including Trupanion, ServisFirst Bancshares and Tandem Diabetes Care, are up more than 38% in the ongoing quarter — outperforming all of the Magnificent Seven stocks by a mile, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
What do most of these top stocks going into the second half of the year share? Nine of the 11 are small-caps inside the S&P 1500. They're many times smaller than the Magnificent Seven megacaps, like Apple, Microsoft and Alphabet, which had been driving the S&P 1500 and S&P 500 all year.
"Investors have ... added smaller companies with the potential to grow faster if the U.S. indeed avoids a recession," said Todd Rosenbluth of VettaFi. "After a strong start to the year for large caps, many people have turned to owning more up-and-coming companies in the second half."
Small Caps Pull Ahead Of S&P 500 In Third Quarter
It's not just a few lucky small cap stocks beating the S&P 500 and Magnificent Seven. The trend is broad.
The SPDR Portfolio S&P 600 Small Cap ETF is up 4.7% this quarter so far. That tops the S&P 500's 2.8% gain in that time. But it's also well ahead of the Invesco QQQ Trust's 2.2% rise. Small cap stocks as a group are also topping all but two of the Magnificent Seven stocks. Only Nvidia and Alphabet are doing better.
Cyclical sectors, which do best when the economy is strong, are driving much of small stocks' outperformance in the quarter, says Nicholas Colas of DataTrek Research. That includes stocks in the energy, financial and materials sectors, he says.
"When small cap cyclicals start to lead, it is hard to deny that investor confidence in the U.S. economy is improving, and dramatically so in the case of (third quarter) to date," Colas said.
But it's not simply a short-term small-cap rally, either. Small caps topped large cap roughly 9 in 10 times over various 15-year investment horizons, index provider MSCI found. Smaller stocks are more attractively priced than larger ones, MSCI says. Additionally, small caps also tend to outperform large stocks following recessions.
How To Make Big Money On Small Caps
Given how diverse the small-cap stock universe is, ETFs are a powerful tool to add exposure to your portfolio.
Small-cap ETFs, generally, will tilt you more toward cyclical stocks than the Nasdaq 100 and even the S&P 500 will, Rosenbluth says. "While large cap indexes tend to be dominated by information technology companies, small cap indexes have more industrials companies," he said.
It's important to note, though, two ETFs might be very different from each other — even if both have the words "small cap" in their names, Rosenbluth says.
Two popular small-cap ETFs highlight the differences. The iShares Core S&P Small Cap 600 ETF owns stocks with a median market value of $1.5 billion, Rosenbluth says. And it also only invests in companies notching four straight quarters of positive earnings.
On the other hand, Vanguard Small-Cap ETF owns much larger smallish companies with a median market capitalization of $6 billion, Rosenbluth says.
"It's important to note that not all small cap ETFs are the same," Rosenbluth said.
Top S&P 1500 Stocks This Half So Far
Most are small-caps (shown in bold)
| Company | Ticker | Index | Quarter-to-date change | Sector |
|---|---|---|---|---|
| Vicor | S&P 400 (Midcap) | 73.5% | Industrials | |
| Trupanion | S&P 600 (Small) | 50.3 | Financials | |
| Tandem Diabetes Care | S&P 600 (Small) | 47.6 | Health Care | |
| ServisFirst Bancshares | S&P 600 (Small) | 45.9 | Financials | |
| Zions Bancorporation | S&P 500 (Large) | 43.1 | Financials | |
| Sleep Number | S&P 600 (Small) | 41.9 | Consumer Discretionary | |
| Trinseo | S&P 600 (Small) | 40.0 | Materials | |
| Hudson Pacific Properties | S&P 600 (Small) | 39.6 | Real Estate | |
| Bank of Hawaii | S&P 600 (Small) | 39.4 | Financials | |
| BankUnited | S&P 600 (Small) | 38.5 | Financials | |
| Customers Bancorp | S&P 600 (Small) | 38.1 | Financials |
