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US small‑caps quietly notch historic outperformance versus tech
The Globe & Mail’s most recent equity‑research piece, “US small caps quietly notch historic outperformance versus tech,” charts a remarkable – and largely under‑the‑radar – shift in the U.S. equity market. By drawing on MSCI index data, analyst commentary and a few headline‑making company stories, the article shows that the U.S. small‑cap universe has not only kept pace with, but outpaced, the technology sector over the last year and a half. The upside is already historic, the author notes, because it marks the first time in more than two decades that small caps have eclipsed mega‑cap tech on a cumulative basis.
A data‑driven swing
The centerpiece of the analysis is a set of year‑to‑date and cumulative returns for the MSCI US Small‑Cap Index versus the MSCI US Technology Index. In the 12 months ending March 2024, the MSCI Small‑Cap was up 14.8 %, while the technology index was down 2.1 %. If we look at the cumulative return since the peak of the tech rally in early 2023, the small‑cap index has risen roughly 16 % versus a 5 % decline in tech. The article links to Bloomberg’s live performance charts, giving readers an instant visual of the swing.
The author explains that the outperformance is not just a “catch‑up” story; small caps have been outperforming tech on a risk‑adjusted basis for the past 18 months. The Sharpe ratio for small caps is 1.32 versus 1.01 for tech, and the beta for small caps is 0.85 versus 1.07 for tech – meaning small caps are not only delivering higher returns but doing so with less systematic risk.
Why the shift?
Three main factors are highlighted:
Valuation divergence
The article notes that the trailing P/E for small caps sits around 21, versus a tech P/E of 35. Even when you adjust for growth expectations (PEG ratio), small caps still trade at a 2‑3× discount to tech. The piece links to a recent MSCI “Price‑to‑Growth” report that breaks out valuations by sub‑sector, showing the smallest spreads in consumer staples and healthcare.Dividend advantage
One of the most compelling arguments in the article is the yield differential. The MSCI Small‑Cap Index yields 4.2 % – more than triple the tech index’s 1.4 %. For income‑seeking investors, that alone can explain a large portion of the return spread. The article even pulls in a chart from Morningstar that tracks the dividend income generated by the Vanguard Small‑Cap ETF (VB) compared with the Technology Select Sector SPDR (XLK).Interest‑rate resilience
The piece argues that small caps are less sensitive to the Fed’s tightening cycle. Because many small‑cap companies are not pure growth businesses – they often have mature product lines, established customer bases, and recurring revenue – their earnings are more insulated from rising borrowing costs. The author quotes a senior analyst at Invesco who says, “Small caps have a built‑in cushion. Their cost of capital is already higher, so an interest‑rate hike is a smaller shock than for the high‑growth tech giants.”
Broader context
The article also frames the story within a broader macro backdrop. The U.S. economy remains in a tight‑rope scenario – inflation is receding, but the labor market remains strong. In this environment, the “size premium” – the long‑term outperformance of smaller firms – is once again on the surface. The Globe & Mail references a 2019 Fama‑French paper that documents the size premium as one of the most robust anomalies in equity markets. The piece even links to a recent CNBCTV article that highlights how small caps have been “the new frontier” for institutional investors looking for alpha amid a muted tech cycle.
Risks and caveats
While the headline is upbeat, the article does not shy away from the downside risks that accompany small‑cap investing. Liquidity is a concern: the average daily trading volume for the Vanguard Small‑Cap ETF is roughly 30 % lower than that of XLK. Volatility is another, with the MSCI Small‑Cap Index’s 12‑month volatility at 20 % versus 16 % for tech. The Globe & Mail cites a 2022 Vanguard report that warns investors that “small caps can suffer from greater margin‑call pressure in a sharp sell‑off.”
The piece ends on a balanced note, suggesting that the outperformance could be a “window of opportunity” rather than a permanent shift. It recommends that investors adopt a diversified strategy – perhaps allocating a portion of a core portfolio to small‑cap ETFs while keeping a core tech allocation for its growth potential.
Takeaway:
For the first time in more than two decades, U.S. small‑cap stocks have outperformed the technology sector on a cumulative basis. Valuation, dividend yield, and interest‑rate resilience appear to be the key drivers. While small caps bring higher risk and liquidity concerns, they offer a compelling source of alpha for investors willing to weather the volatility that comes with the “size” factor. The Globe & Mail’s article makes a persuasive case that small caps are quietly carving out a historic niche in the current equity landscape.
Read the Full The Globe and Mail Article at:
[ https://www.theglobeandmail.com/investing/article-us-small-caps-quietly-notch-historic-outperformance-versus-tech/ ]