Small-cap stocks and the relevant exchange-traded funds are trouncing their large-cap counterparts this year, a theme that isn't showing much sign of abating.

The iShares Core S&P Small-Cap ETF IJR, which tracks the S&P SmallCap 600 Index, is up 18.3 percent this year while ETFs and index funds tracking the larges-cap S&P 500 were higher by 9.7 percent.

What Happened

Last month, the U.S. bull market became the longest on record. Of course that means some stellar returns for the S&P 500 and large-caps since March 10, 2009, but smaller stocks have been even more impressive.

“While the record-breaking Bull market for the S&P 500 is spectacular, mid-caps and small caps did even better,” said S&P Dow Jones Indices. “The S&P MidCap 400 posted an annualized 18.6% equity return and 20.5% with dividends, and the S&P SmallCap 600 posted an annualized 20.9% equity return and 22.4% with dividends.”

The iShares Core S&P Mid-Cap ETF IJH and the SPDR S&P MidCap 400 ETF MDY are among the ETFs offering exposure to the S&P MidCap 400 Index.

Why It's Important

Smaller stocks continue topping their large-cap rivals. Last month, IJR beat the S&P 500 by 150 basis points. Two months into the third quarter, IJR is beating the S&P 500 by 30 basis points on a quarter-to-date basis.

“The small cap outperformance was widened in Aug. with a monthly return of 4.8% versus 3.3% for large caps and 3.2% for mid-caps,” according to S&P Dow Jones. “It was the sixth straight positive month for small-caps delivering a total return of 20.0% over the period in the strongest run since the six months ending Mar. 2012, when the index gained of 31.2%.”

Last month, nine of 11 small-cap sectors generated positive returns.

What's Next

Sectors such as health care and industrials are driving domestic small-cap benchmarks higher this year. Those sectors combine for nearly a third of IJR's weight.

“For example, industrials, the biggest sector in the S&P 600, is having its best year since 1997, up 17.5% ytd, and its third best on record,” according to S&P Dow Jones. “The smaller companies of this sector may be more insulated from U.S.-China trade tensions and also has less revenues coming from overseas so has outperformed the large-cap industrials. Also, heath care in small caps is having its second best year on record, up 47.4%, the best ytd performance since 2000.”

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