Small Caps vs Large Caps: 8.50% vs 11.12% a Year

$10,000 in US small caps in December 2005 grew to $54,632 by October 2026, with dividends counted. The same sum in US large caps grew to $89,801.

Small caps are smaller listed companies, while large caps are the biggest. Both figures treat dividends as reinvested, before costs and tax. Small caps also fell further in the 2007 to 2009 crash.

A company's market capitalisation, or market cap, is the price of one share times the number of shares in issue. It is the price the stock market puts on the whole company. A large cap is one of the biggest companies by that measure. A small cap is a much smaller one.

We do not draw the line ourselves. We use two ETFs, each of which follows an index. Our explainer on what an ETF is covers the structure.

SPY is the S&P 500 ETF run by State Street. Its issuer says it follows the S&P 500 Index, which measures the large-cap segment of the US stock market. Our explainer on the S&P 500 covers the index.

On 23 October 2026 the median company in that index was worth $44.5 billion, according to the issuer.

IWM is the iShares Russell 2000 ETF. Its issuer says it seeks to track the Russell 2000 Index and offers exposure to US small-cap stocks. On 23 October 2026 it held 1,980 companies.

In this post, "small caps" means IWM and "large caps" means SPY. The findings are for these two funds, not for every small or large company.

We put $10,000 into each fund at the close on 30 December 2005, the last close before 2006. We valued both at the close on 26 October 2026. That is 5,237 closing prices over 20.8 years.

"With dividends counted" means the payouts are treated as reinvested. The issuers' pages show yearly fees of 0.19% for IWM and 0.0945% for SPY, so the fee gap is about 0.10 points a year. Nothing is adjusted for inflation, dealing costs or tax.

Large caps turned $10,000 into $89,801, which is 8.98 times the money, or 11.12% a year. Small caps turned it into $54,632, which is 5.46 times, or 8.50% a year.

The compound annual rate is the single yearly return that turns the starting sum into the ending sum. Our explainer on why the compound rate and the average differ covers it.

The gap is 2.62 points a year, or $35,169 on the stake.

The size premium, also called the small cap premium, is the extra return small companies earn over large ones, on average, across long periods.

We measure it as the gap in annual rates, small caps minus large caps. In this window the gap is -2.62 points a year.

Small caps did swing more. Volatility is how widely a price swings from day to day, scaled to a year. Small caps had 24.27% a year, against 19.18% for large caps.

Our explainer on standard deviation covers the maths.

So the test shows the extra swings without the extra return. It covers one pair of funds over one window, so it does not rule out a premium elsewhere.

The bars show the gap in each year: to the right, small caps led.

A calendar year runs from 1 January to 31 December. Small caps beat large caps in 8 of the 20 calendar years from 2006 to 2025: 2006, 2008, 2009, 2010, 2012, 2013, 2016 and 2020. In 2026, a part year that ends on 26 October, small caps returned 13.3% against 13.1%.

The best year for small caps was 2010, when they returned 26.9% against 15.1%. The worst was 2021, when they returned 14.5% against 28.7%. Small caps trailed in each of 2023, 2024 and 2025.

Small caps lost money in 6 of the 20 years, against 3 for large caps. Large caps fell in 2008, 2018 and 2022. Of those three, small caps lost less only in 2008, with a fall of 34.1% against 36.8%.

The bars show each fund's largest peak-to-trough fall between 30 December 2005 and 26 October 2026.

A fall from a high is the drop from a fund's highest price to a later low. Small caps fell 59.0% from their high of 9 July 2007 to 9 March 2009. Large caps fell 55.2% from their high of 9 October 2007 to the same day.

Small caps then regained their old high first, on 11 February 2011. That is 3.59 years after the high. Large caps took until 16 August 2012, which is 4.85 years. Recovery time runs from the high, so it includes the fall.

Small caps fell more than 20% from a high six times in the window. Large caps did so three times.

The size of the gap changes with the start. We repeated the comparison from the last close of four different years to 26 October 2026.

Compound annual rates with dividends counted, from the last close of each year to 26 October 2026. The gap is small caps minus large caps. Source: YX Insights price data

The table shows the gap from each start date.

Large caps came out ahead from all four starts. IWM launched on 22 May 2000, according to its issuer, so 2001 is its first full year.

Splitting our window in two shows where the gap opened. Over the first eleven years, from 30 December 2005 to 30 December 2016, small caps earned 8.10% a year and large caps 7.66%. From 30 December 2016 to 26 October 2026, they earned 8.94% against 15.13%.

A ten-year stretch is ten years of returns. We took every stretch that starts at a month-end close, then moved the start forward one month at a time. That gave 131 stretches, ending between 31 December 2015 and 26 October 2026.

Each point on the chart is one stretch. A point above zero means small caps led.

They led in 15 of the 131. All 15 ended between 30 November 2016 and 29 June 2018. Their biggest lead was 0.65 points a year, in the stretch ending 31 May 2018.

Their biggest deficit was 6.48 points a year, in the stretch ending 30 June 2025. In the stretch ending 26 October 2026, the deficit was 5.26 points a year.

Each result is for a fund, not an index. A different pair of funds, or a different window, would give different figures. The test makes no forecast. Our explainer on asset classes places shares among the others, while why the S&P 500 is hard to beat looks at the large-cap side.

In this test, small caps earned less than large caps and swung more. They did not beat large caps.

The Academy is free to read, here on the web. The Long Trend, our free weekly letter, comes by email.

This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

Not in our test. From 30 December 2005 to 26 October 2026, with dividends reinvested, the small-cap fund IWM earned 8.50% a year and the large-cap fund SPY earned 11.12%. Small caps beat large caps in 8 of the 20 calendar years, meaning January to December. The result covers two funds only.

It means the extra return that small companies earn over large ones, on average, over long periods. It is measured as the gap in annual rates, small caps minus large caps. In our test the gap was -2.62 points a year: IWM earned 8.50% a year, against 11.12% for SPY.

In our test, yes. Volatility, the width of price swings scaled to a year, was 24.27% for small caps against 19.18% for large caps. Small caps fell 59.0% at their worst, against 55.2%. They lost money in 6 of 20 calendar years, against 3. They regained their 2007 high sooner, though.

The difference is the size of the company, measured by market cap, which is the share price times the number of shares. A large cap is among the biggest companies. A small cap is a much smaller one. In the S&P 500, an index of large US companies, the median company was worth $44.5 billion on 23 October 2026.

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.