If a strong move in the last four months of 2010 meant a good year for stocks in general, it was great for small cap stocks.
The S&P SmallCap 600 (IJR) finished up 26% in 2010 compared to a 14% gain for the large cap S&P 500.
Small cap stocks outperformed for a number of reasons with easy monetary policy and signs of a recovering economy as primary drivers for investors to take on more risk.
The question for 2011 is whether small cap stocks will continue to outperform. The current P/E of 26 is above historical averages and small caps tend to be the first to fade towards the end of a bull market.
According to Wall Street Journal reporter Ben Levisohn, small caps also have a history of outperforming the broader market for several years in a row. For example, Levisohn points out that the S&P 600 outperformed the S&P 500 every year from 2000 through 2006.
True to its name, the $7 billion IJR fund holds 600 small cap stocks on a market-cap weighted basis. Top holdings include Oil States International, Cypress Semiconductor, Salix Pharmaceuticals and Varian Semiconductor. The fund’s expense ratio is 0.2% and 12 month yield is 0.9%