Compelling Small- And Mid-Cap Investment Themes

The first half of 2023 has proven to be rewarding for US equity investors with all major indexes up. The Nasdaq, led by mega-cap technology stocks, has been especially strong with a first half gain of over 30%. However, returns have not been as strong for smaller capitalization stocks. On a relative basis, both small indexes (Russell 2000 Growth, tracked by the ETF IWO
IWO
) and the mid-cap growth index (Russell Midcap Growth, ETF IWP
IWP
) have lagged the Nasdaq 100 (QQQ
QQQ
) and the total Nasdaq over the first six months. In fact, the mid-cap growth index’s relative performance has never been worse in its 21-year history. Likewise, the small-cap index is also nearing its all-time worst relative performance versus the Nasdaq 100, which occurred in Q1 2020. The relative performance of all small-cap growth and mid-cap growth vs. the Nasdaq 100 can be seen in Figure 1 and 2 below.

On a trailing one-year basis, the performance spreads are not as extreme. When combining the two periods, it does look like there is possibly a short-term reversion. Still, it is unclear about the longer-term relative turning point (Figures 3 and 4).