Think large caps are still the best bet? The data say you are looking in the wrong place.
U.S. small-cap stocks have beaten the largest stocks for over a year.
Look for small-cap U.S. stocks to continue beating the largest stocks.
That's because small-cap relative strength trends tend to persist, and U.S. small-cap stocks have beaten the largest caps for over a year. Over the past 12 months (through July 10), the Russell 2000 index RUT, which represents small- and midcap stocks, produced a total return of 20.7%, versus 11.3% for the large-cap-dominated S&P 500 SPX.
The trend-following tendency of small-cap relative strength is consistent with my analysis of small- and large-cap returns over the past century. Relative strength over the trailing year is the strongest predictor of whether the smallest stocks will beat the largest in a given month. Put simply, outperformance persists, and so does underperformance. No other factor that I studied, including trends in inflation, interest rates or the overall market, had any ability to forecast whether small-cap relative strength would continue.
Quality counts
If you bet on small-cap relative strength as a portfolio strategy, you should know that it's important to pay close attention to each company's balance sheet and income statement. That's because there's a huge divide in the small-cap sector between companies with solid financials and those without. Small "junk" stocks tend to perform poorly - regardless of whether small stocks overall are leading the market.
Several ETF options are available to invest in small-cap quality stocks. One example is the Invesco S&P Small Cap Quality ETF XSHQ, with a 0.29% expense ratio. Another is the iShares MSCI USA Small-Cap Quality Factor ETF SQLT, with a 0.20% expense ratio.
To invest in individual small-cap quality stocks, consider those in the table below. To construct it, I started with a list of stocks that are recommended by any of the investment newsletters that my performance-auditing firm monitors. I then eliminated any with a market cap above $5.7 billion, which is the breakpoint between the Russell 2000 and the Russell 1000 index RUI of the largest-cap companies. I next eliminated any stocks that had a beta above 1.0, a negative five-year growth rate of net income, a price-to-book ratio above the overall market, and a low dividend-payout ratio.
Each of these criteria have been used in prior studies to differentiate quality stocks from junk. The 15 small-cap stocks listed below are those that survived this winnowing process and boast the highest dividend yields.
Ticker Stock Market cap (in billions) Dividend yield GTY Getty Realty $2.1 +5.60% CALM Cal-Maine Foods $4.2 +5.45% AVA Avista $3.5 +4.70% PEBO Peoples Bancorp (Ohio) $1.4 +4.39% DOX Amdocs $5.6 +4.38% SR Spire $4.8 +4.09% NWN Northwest Natural Holding $2.1 +3.91% OZK Bank OZK $5.5 +3.79% NWE NorthWestern Energy Group $4.5 +3.69% HNI HNI $2.9 +3.50% MZTI Marzetti $3.1 +3.48% OGS ONE Gas $5.0 +3.44% FRME First Merchants $2.7 +3.43% BOH Bank of Hawaii $3.3 +3.39% WABC Westamerica Bancorp $1.4 +3.29% Source: LSEG, Hulbert Ratings
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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July 18, 2026 10:22 ET (14:22 GMT)
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