The headlines in 2026 have been about the same names they’ve been about for years. But the strongest returns in the US stock market this year have not come from the S&P 500 or the Nasdaq. They’ve come from small caps — and specifically, from an index most investors have never heard of: the S&P SmallCap 600.
Through August 17, the S&P SmallCap 600 is up 24%, against 14% for the S&P 500 and 14.5% for the Nasdaq Composite. That matters to you directly, because most of our portfolios hold 10–20% of their equity allocation in this index.
It has not felt like a good decision for the last few years. In 2024 the S&P SmallCap 600 trailed the S&P 500 by more than 16 percentage points; in 2025, by roughly 12. Clients asked us, reasonably, why we owned it at all. Some asked more than once.
This year, that position is contributing meaningfully to client returns.
Why this isn’t a victory lap
Here’s the problem with the paragraph you just read: if the only time we tell you about this holding is the year it wins, we’re teaching you exactly the wrong lesson.
The case for owning small caps has to hold up in 2024 and 2025 just as well as it does in 2026. If it doesn’t, we shouldn’t have owned it then — and you shouldn’t trust us to hold it through the next dry spell. So this isn’t a forecast about what comes next. It’s an explanation of what the long record actually shows, and why that record is the reason this position exists in your portfolio.
What it is, briefly
The S&P SmallCap 600 launched in 1994 and tracks 600 smaller US companies. Two things about it matter for our purposes.
First, a company must be profitable to get in — positive earnings in its most recent quarter and across the prior four quarters combined. That single rule separates it from the more widely quoted Russell 2000, roughly 40% of which is unprofitable companies.
Second, it owns a different economy than the S&P 500 does. Technology is about 13% of the small-cap universe versus roughly 37% of the S&P 500. These are regional banks, manufacturers, distributors, specialty retailers, healthcare services companies — businesses that earn their revenue in the United States. The S&P 500 has become, in substantial part, a bet on a handful of global technology franchises. The SmallCap 600 is a bet on the domestic economy.
The record: 14 wins in 31 years
Over the 31 full calendar years from 1995 through 2025, the S&P 600 outperformed the S&P 500 in 14 of them — about 45% of the time.
Those 14 years are below.
| Year | S&P 600 | S&P 500 | Spread |
|---|---|---|---|
| 2000 | +11.0% | −10.1% | +21.2 pp |
| 2001 | +5.7% | −13.0% | +18.8 pp |
| 2002 | −15.3% | −23.4% | +8.1 pp |
| 2003 | +37.5% | +26.4% | +11.2 pp |
| 2004 | +21.6% | +9.0% | +12.6 pp |
| 2005 | +6.7% | +3.0% | +3.7 pp |
| 2006 | +14.1% | +13.6% | +0.5 pp |
| 2008 | −32.0% | −38.5% | +6.5 pp |
| 2009 | +23.8% | +23.5% | +0.3 pp |
| 2010 | +28.0% | +12.8% | +15.2 pp |
| 2012 | +14.8% | +13.4% | +1.4 pp |
| 2013 | +39.7% | +29.6% | +10.1 pp |
| 2016 | +24.7% | +9.5% | +15.2 pp |
| 2022 | −17.4% | −19.4% | +2.0 pp |
Over the full stretch from 1994 through 2025, the two indices ended up remarkably close on average annual return — roughly 11.8% a year for the S&P 600 against 12.7% for the S&P 500. Similar destinations, very different roads.
The one pattern that matters
Look at those years again. They aren’t scattered across the calendar. They arrive in blocks: 2000 through 2006 was seven consecutive years. Then 2008 through 2013 accounted for five of six. Then the record goes nearly silent — over the twelve years from 2014 through 2025, small caps won only twice.
Leadership between large and small caps behaves like a regime, not a coin flip. Regimes have run the better part of a decade in both directions.
That has an uncomfortable but unavoidable implication: anyone who owns small caps as a diversifier should expect to spend long stretches wishing they didn’t. A three-year lag proves nothing. Neither does a three-year lead. This is why we don’t give up on an allocation after a bad year — and why we don’t pile into one after a good year either.
One more thing worth noticing in the table. In 2002, 2008, and 2022, the S&P 600 “outperformed” while losing money. It simply fell less. That’s the profitability screen doing its job: companies that have to earn money to stay in the index tend to be less fragile when credit conditions tighten.
Why this counts as diversification
It would be easy to justify this position by claiming small caps outperform over the long run. Over the life of this index, that hasn’t been true. The real case is different, and better.
Different holdings aren’t enough — you need different drivers. Two investments that rise and fall together are one investment wearing two names. The S&P 600 moves with the market, but roughly a quarter of its behavior isn’t explained by the S&P 500 at all. That gap is where diversification actually lives.
It offsets a concentration you may not realize you have. The largest handful of technology companies has accounted for roughly a third of the S&P 500’s entire value in recent years. An S&P 500 position is, in meaningful part, a concentrated bet on technology companies. Adding more large-cap exposure doesn’t fix that. Adding an index whose sector mix is nearly the inverse does.
Rebalancing is what turns divergence into return. This is the part most people skip. Two holdings taking turns leading doesn’t help you by itself. Trimming the winner and adding to the laggard on a schedule is what converts that divergence into realized gains.
What it doesn’t do
It won’t protect you in a crash. In 2008 the S&P 600 outperformed by 6.5 points — and still lost 32%. Diversifying across stocks is diversification within one asset class. It is not a substitute for owning things outside the stock market entirely, which is a separate part of how your portfolio is built.
It also won’t make the ride smoother. Small caps are more volatile on their own. The benefit is in the range of long-term outcomes, not in the comfort of getting there.
The bottom line
We didn’t add this position because we predicted 2026. We hold it because it’s driven by a different economy than the S&P 500, because its leadership has historically arrived in multi-year stretches rather than randomly, and because that divergence gives our rebalancing discipline something to work with.
That’s why we held it through 2024 and 2025, when it hurt and the case for dropping it was easy to make. It’s the same reason we hold it now, when it’s helping. The reasoning didn’t change. Only the scoreboard did.
If you’d like to see how this is sized in your specific accounts, we’re glad to walk through it.
This material is for educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Index returns do not reflect fees, expenses, or taxes, and it is not possible to invest directly in an index. Past performance is not a guarantee or indicator of future results. Calendar-year figures are through year-end 2025; 2026 figures are through August 17, 2026.
Note: This article was prepared with the assistance of AI-based drafting and research tools. The ideas, analysis, and conclusions reflect the views of Blue Haven Capital and were reviewed prior to publication.
