Growth Factor Still Working With Small-Caps

It will take more than one month for value stocks to truly shed their laggard ways, but notable is the fact that at the large-cap level, value outperformed growth in July. Large-cap value outperforming growth hasn't been a regular occurrence during this bull market.

While large-cap value may finally be showing signs of life, investors looking to stick with growth stocks don't need to fret. Small-cap stocks and exchange traded funds dedicated to the growth factor held up well last month.

What Happened

“In July, the total return of the S&P SmallCap 600 Growth was 3.75%, which was 1.15% higher than the total return of 2.60% generated by the S&P SmallCap 600 Value,” said S&P Dow Jones Indices in a recent note. “This is interesting since typically growth does not outperform value in small caps when value outperforms growth in large and mid caps.”

The iShares S&P Small-Cap 600 Growth ETF IJT is one of the ETFs that tracks the S&P SmallCap 600 Index. That fund is up nearly 17 percent year-to-date while the broader S&P SmallCap 600 Index is up 13.38 percent.

Data suggest it's rare that growth's outperformance of value when confined to the small-cap universe is rare.

Why It's Important

“In 255 months, going back to May 1997, there are only 17 times when growth outperformed value in only small caps,” according to S&P Dow Jones. “It is even rarer to find growth performing better than value in just small caps with the current magnitude of outperformance.  It was in Sep. 2005, almost 13 years ago, when the outperformance of small cap growth over value was this big while value outperformed growth in large and mid caps.”

Potential for outperformance by small-cap growth stocks is often reliant on the healthcare and technology sectors. IJT reflects as much, allocating over 35 percent of its combined weight to those sectors. The ETF's largest sector allocation is 21.64 percent to industrials.

Some investors may believe growth stocks are more volatile than broader benchmarks, but IJT's three-year standard deviation 13.46 percent is 30 basis points below the same metric on the S&P SmallCap 600 Index.

What's Next

If small-cap health care and industrial names keep performing well, it would be reasonable to expect small-cap growth to do the same.

“Also industrials and health care are the two most overweighted sectors in small caps when comparing growth to value,” according to S&P Dow Jones. “Health care has 13.2% more weight in growth than value in small caps, while small cap industrials weigh 3.6% more in growth than value.”

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