Are large-cap or small-cap stocks more risky?
Large-cap stocks are generally considered to be safer investments than their mid- and small-cap stock counterparts because they are larger, more established companies with a proven track record. Some of the biggest names in business are large-cap stocks – Apple, Microsoft and Alphabet, for example.
Key Takeaways. Small-cap stocks tend to offer greater returns over the long-term, but they come with greater risk compared to large-cap companies. The greatest downside to small-cap stocks is the volatility, which is greater than large-caps.
Large-cap funds are less risky than small and mid-cap funds. Small and mid-cap funds have higher growth potential than large-cap funds. Large-cap funds are good for conservative investors. Mid and small-cap funds are suitable for medium-risk takers to aggressive investors.
Large-cap stocks are a good option if you want to invest in a company's stocks by taking less risk. These stocks are less volatile than mid-cap and small-cap stocks, and lower volatility makes them less risky.
Why small-cap stocks are risky. As small-cap businesses expand, their stocks offer a higher growth potential compared with larger companies. But that comes with a greater risk of volatility — including more (and bigger) fluctuations in stock prices and earnings reports.
Because smaller companies have smaller market capitalizations, their indices aren't as likely to reflect huge concentrations in the way a large-cap index that's home to a massive market-cap company is.
Small-cap mutual funds perform well over a long period of time. However, over a short period of time, they tend to be very volatile. So if you plan on withdrawing/redeeming your money from the mutual fund early, you could suffer losses. Sure, you could also make gains, but there is always the risk.
That is: Small-cap stocks have outperformed in prior interest rate cutting periods — and their exposure to higher interest rates wasn't as bad as feared.
Large-caps are generally safer investments than their mid- and small-cap counterparts because the companies are more established, but their stocks may not offer the same potential for high returns.
The small firm effect theory posits that smaller firms with lower market capitalizations tend to outperform larger companies. The argument is that smaller firms typically are more nimble and able to grow much faster than larger companies.
Do small caps outperform the S&P 500?
Small caps will outperform the S&P 500 by at least 50% in 2024, according to Fundstrat's Tom Lee. Projected earnings, valuations, and revenue growth of small-caps are set to outshine large-caps in 2025.
Investors pay close attention to the performance of smaller stocks because it offers signals about the health of the U.S. economy. Smaller companies typically outperform coming out of a recession. They rallied briefly in late 2020 after Covid-19 vaccines boosted hopes about an economic recovery.
As of April 2024 Apple has a market cap of $2.614 Trillion. This makes Apple the world's second most valuable company by market cap according to our data.
Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it. So dividend stocks will fluctuate with the market but may not fall as far when the market is depressed.
Small caps are also more susceptible to volatility due to their size. It takes less volume to move prices. It is common for the price of a small-cap stock to fluctuate 5% or more in a single trading day. That is something that many investors simply cannot stomach.
The earnings of large-cap companies tends to be far less volatile than the earnings of the mid-cap or small-caps. The lower earnings and stock price volatility makes large-cap stocks and funds a good choice for investors seeking a less volatile/risky exposure to equities.
Small-cap stocks have a long-term performance advantage over large-cap stocks, and this is often referred to as the small-cap effect. Small-cap stocks are said to be economically sensitive and therefore rally in recoveries and lag heading into recessions.
Small caps not filtered for quality were 8X more likely to lead to a permanent loss of capital than their higher-quality counterparts. [Data considered from 2010 to Dec 2023.
Given that advisors are fond of saying that small cap stocks are much riskier than the stock of larger companies, it usually surprises investors to find out that, over long periods, small cap funds outperform their large cap counterparts.
High Growth Potential
Small cap funds primarily invest in companies with smaller market capitalisations, which often have significant growth potential. These companies are at an early stage of development and can experience rapid expansion, leading to higher returns for investors.
Is VTI or VoO better?
However, if you know that you'd like a bit more exposure to smaller and medium-sized companies or just want to invest in more stocks overall, VTI is your best bet. VOO, meanwhile, is the better option for investors who want to focus heavily on large cap companies.
The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.
Russell 2000 ETFs may look more attractive than S&P 500 ETFs at the start of a bull market and may outperform their S&P 500 index counterparts during an uptrend, but with volatility or fluctuations in those returns.
Small-cap stocks are riskier and more volatile investments, as they do not have the same financial resources large-caps do and are still developing their businesses.
While large-cap stocks have led the pack in recent years, investors shouldn't abandon a broadly diversified approach to building a portfolio. No single asset class, sector, style, or stock will remain dominant indefinitely.
