Are Smaller Company Stock Returns Higher?

By Eric Tyson

Stocks are generally classified by the size of the company. Small-company stocks aren’t stocks that physically small companies issue; they’re simply stocks issued by companies that haven’t reached the size of corporate behemoths such as IBM, Wal-Mart, or Coca-Cola. The Standard & Poor’s 500 index tracks the performance of 500 large-company stocks in the United States. The Russell 2000 index tracks the performance of 2,000 smaller-company US stocks.

Small-company stocks have outperformed larger-company stocks during the past seven decades. Historically, small-company stocks have produced slightly higher compounded annual returns than large-company stocks. However, nearly all this extra performance is due to just one high-performance time period, from the mid-1970s to the early 1980s. If you eliminate this time period from the data, small stocks have had virtually identical returns to those of larger-company stocks.

Also, be aware that small-company stocks can get hammered in down markets. For example, during the Great Depression, small-company stocks plunged more than 85 percent between 1929 and 1932, while the S&P 500 fell 64 percent. In 1937, small-company stocks plummeted 58 percent, while the S&P 500 fell 35 percent. And in 1969 to 1970, small-company stocks fell 38 percent, while the S&P 500 fell just 5 percent.