The Russell 2000 ETF has underperformed the S&P 500 ETF by 340 points since 2010, challenging the long-held small-cap premium theory.
The iShares Russell 2000 ETF (IWM) has returned 490% since 2010, lagging the Vanguard S&P 500 ETF (VOO), which gained 830% in the same period. This 340-percentage-point gap contradicts the small-cap premium theory, which posits that smaller companies deliver higher long-term returns due to greater risk.
Historically, investors expected small caps to outperform large caps, but the trend reversed over the past 15 years. Lower profitability, with 40% of Russell 2000 components currently unprofitable, and higher sensitivity to interest rates have weighed on small-cap performance. The shift challenges traditional portfolio diversification strategies.
Despite recent underperformance, some analysts see potential in small caps if earnings growth accelerates, though the long-term premium remains elusive.