Which Market Cap Is Best? Large (SPY) vs. Mid (IJH) vs. Small (IWM)

by on April 29, 2013 | ETFs Mentioned:

As the ETF universe continues to expand, more and more issuers are digging deeper into the existing categories, trying to once again carve out their own niche market. There are a number of market-cap-specific funds to fit every investor’s needs, and many investors are electing to complement large and mid cap equity positions in their portfolios with a small cap ETF that offers exposure to a diversified basket of stocks. In times when key large cap holdings are not performing up to scratch, the hope is that riskier mid and small cap firms will bring in returns.

Don't forget about MIcro Caps!The following three influential funds create an effective picture of the past five years in individual market caps, allowing investors to reflect on which size is best in each market situation: State Street’s SPDR S&P 500 (SPY, A), iShares Coare S&P Mid-Cap ETF (IJH, B+) and the Russell 2000 Index Fund (IWM, B+) [see also How To Pick The Right ETF Every Time].

These equity ETFs are the three largest single market cap funds, holding between $130 billion and $15 billion in total assets under management each. While all of the funds reacted to the 2008 market crash, nothing was as dramatic as the buying and selling of SPY, which, due to its size and popularity, would almost always overwhelm the other funds’ inflows.

Though IJH and IWM may seem very stable in compassion, each fund also had better to worse years for inflows in quick succession. In comparison, both the mid and small cap ETFs had generally stronger returns over the last five years compared to SPY [try our Free ETF Head-To-Head Comparison Tool].

 

The Bottom Line

Although most U.S. investors build their portfolios around a core of large cap domestic equities, small and mid-cap firms are a vital component of any portfolio. Because smaller cap stocks tend to also have smaller customer bases, shorter operating histories and less cash on hand, they are often more volatile than their large cap counterparts; however, because they possess greater growth potential, small caps also carry potential for greater returns, especially when the markets are turning back around from a slow down.

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Disclosure: No positions at time of writing.