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ETF Specialist

Capitalizing on the Size Differentials

Large-cap stocks look cheap relative to small-cap stocks.

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Those who sold stocks during or after the crash and were slow to reinvest as the market rallied might want to use the recent sell-off as a buying opportunity. Over the past year, taxable-bond funds have seen net inflows of about $330 billion while stock funds have lost $10 billion. This would suggest that investors are seeking the safety of bonds. But at the same time, small-cap funds have seen about $12 billion of inflows while large caps have seen about $45 billion in outflows. In this article, we argue that now is a good time to invest in large-cap stocks relative to small-cap stocks and make some suggestions about which exchange-traded funds to use.

Depending on how they are grouped, small-cap stocks make up only around 10% of the U.S. equities market. Thus, they should make up only a small portion of the equities allocation and an even smaller portion of the total portfolio once bonds are included. For example, U.S. small-cap equities make up just 8% of our Hands-Free Portfolio, a low-maintenance portfolio built entirely of ETFs designed for long-term investors. In this article, Christine Benz discusses how to conduct a midyear portfolio review, including the use of the  Morningstar Asset Allocator tool.

Michael Rawson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.