Small-Cap Stocks Have 2 Key Advantages Over Large-Cap Stocks Right Now

Small caps underperformed the S&P 500 in 2014.

The Russell 2000 index returned 4.89% while the S&P 600 returned 5.76%. That compares to the 13.7% gain for the S&P 500.

RBC’s Jonathan Golub wrote in a note Monday that cheap oil and a strong dollar — two things that are hurting some companies — could drive the relative performance of small caps this year.

“Specifically, as the greenback rises, larger cap multiples tend to expand on the back of foreign fund flows,” Golub wrote. “Small caps do not participate in these capital shifts. Put differently, while small cap earnings are likely safeguarded from a higher dollar, this does not offset the relative drag on multiples.”

The S&P 600 has less than half the weight in energy that the S&P 500 does.

“The small cap index is actually slightly more sensitive to oil price movements,” Golub continued. “This stems from two factors: 1) commodity-sensitive names — E&P and Service companies — carry a similar weight in each benchmark; and 2) oil acts as a proxy for growth, and small caps are more levered to economic activity.”

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