×

Big or small? In 2016, medium is just right

Goldilocks and the three bears
Paul Hardy | Getty Images
Goldilocks and the three bears

If you're looking for portfolio returns this year, it might be best to look for stocks that aren't too big or too small.

Think of it as the Goldilocks investing strategy: Shares in companies that are the largest or the smallest among publicly traded companies aren't showing performance like medium-sized companies. The S&P 400, an index of mid-cap companies from across the U.S. economy, is up 3.7 percent this year, as of the close Friday. Compare that with small caps up 1.4 percent and the more popular S&P 500, an index of big-cap companies, up just 0.4 percent.

Of the three main groups, mid-caps have generally not been the best performing. Looking at quarterly returns over the past 20 years, here's which group had the best return:

33 percent S&P 500 — large cap
28 percent S&P 400 — mid cap
40 percent S&P 600 — small cap

Kate Spade, Dicks, WebMD

Among the 400 mid-cap companies in the index, 253 of them are up this year, including 53 that are up more than 20 percent.

Some of those standouts include consumer names like WebMD (up 37 percent year to date), Kate Spade (24 percent), Dick's Sporting Goods (23 percent) and Hain Celestial (21 percent). The average market cap for these four companies is just $3.8 billion.

Two giants of past times are also on the list: United States Steel (up 67 percent) and Advanced Micro Devices (up 25 percent). The combined market cap of these two companies is just $5 billion, a far cry for how important they used to be.

Daniel Suzuki, Bank of America Merrill Lynch equity strategist, told CNBC in April that "we've had a spectacular rally" when discussing mid-cap gains of 20 percent from the February lows. "Some of that rally we think is justified by improving macro data."

It might not last forever

Contrast this phenomenon to what we saw last year, when the 10 largest stocks were responsible for all the returns on the S&P 500. The market then was moving not because of strength across a variety of stocks and sectors.

This year is different, as the market's underbelly is what's doing better, while some of the largest names haven't fared so well. This has been a year where a strategy with broader diversification has paid off.

Correction: Small caps were up 1.4 percent for the year as of Friday's close. An earlier version misstated this fact.