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Because Markets Change: Small Cap and Large Cap

Small- & Large-Cap Stocks
Just as growth and value stocks and international and domestic markets go in and out of favor so do small- and large-capitalization stocks. 

Small-cap companies tend to have greater growth potential than large-cap companies, so they tend to do well when the economy is growing and investors are confident. Small-cap stocks are also generally more volatile than established large-cap companies, and in volatile markets, investors tend to value the stability offered by larger companies like Exxon, Apple or Coca-Cola. Even in 2008’s decline, few investors worried that a company like Coca-Cola would go under. 

Historically there have been many distinct periods when small-caps led and when large-caps led.  The chart, below, shows the last 21 years of small- and large-cap leadership cycles. These cycles have typically lasted many years. Large-caps outperformed small-caps for nearly six years  from 1996 to 2001; small-caps dominated for seven years from 2001 to 2007. 

During periods of sustained market leadership, it’s easy to believe that one area of the market will continue to lead. In the 1990s, for example, it would have been easy to think that large-caps would always be the best place to invest.  But as the chart indicates, markets do eventually change. Small-cap stocks did come back into favor and outperformed large-cap for seven straight years.

Because markets change, some investors hold both small-caps and large-caps so their portfolios will participate when large-caps are in favor and also when small-caps are in favor. But the trouble with this approach is clear in the chart: it’s hard to continue holding small-caps during years when they are badly lagging behind large-caps, and it’s hard to continue holding large-caps during the years when small-caps are leaping ahead.  

We believe a better approach is to adapt to market changes. In the FundX Upgrader Funds, we increase our allocation to large-caps in periods of large-cap leadership, and we allocate more to small-caps when small-caps stocks are in favor. 


Understanding Capitalization - Large- and small-cap refers to a company’s market capitalization, the dollar value of the company’s shares. Small- and large-cap stocks are just two capitalization categories. There are also mega-caps, mid-caps and micro-caps. 

Small-cap stocks - The average market cap of the stocks in the small-cap Russell 2000 index is $1.4 billion. The top three holdings aren’t well-known to most investors: Ocwen Financial, Axiall Corporation, Pharmacyclics

Large-cap stocks - The average market cap of the stocks in the large-cap Russell 1000 index is $93 billion. The top three holdings are well-known to most investors: Apple, Exxon, General Electric.

The holdings of the FundX Upgrader Funds are linked below:

Fund holdings and sector allocations are subject to change and are not a recommedation to buy or sell any security.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index.The Russell 1000 Index measures the performance of the approximately 1000 of the largest companies in the Russell 3000 index. You cannot invest directly in an index.

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