Charles Schwab’s historical ten-year comparison put average annual returns for small-cap stocks in the Russell 2000 at 7.9%, below the S&P 500’s 13%. Separate research by Acadian Asset Management suggests the small-cap benchmark’s risk-adjusted performance was broadly consistent with its own longer-term record.
The findings provide two perspectives on the gap between smaller and larger listed companies. Schwab’s figures describe a difference in returns between the benchmarks, while Acadian’s analysis considers how the Russell 2000 performed relative to the risk involved.
Historical returns and risk-adjusted performance
Schwab reported the following average annual returns for the ten-year period in its comparison:
| Index | Reported average annual return |
|---|---|
| S&P 500 | 13% |
| Russell 2000 | 7.9% |
Acadian examined a different measure: the Sharpe ratio, which assesses returns relative to risk. It found that the Russell 2000’s ratio averaged about 0.40 over the decade it studied, compared with 0.39 over its longer observation period beginning in 1995.
That comparison suggests small-cap stocks did not perform unusually poorly against their own historical risk-adjusted record. Their weaker showing relative to large caps is a separate finding. Neither comparison establishes that the return gap will persist indefinitely or identifies when it might narrow.
The distinction also limits what the headline return figures can explain. A comparison between two indexes describes their relative performance; Acadian’s historical comparison addresses whether one benchmark’s risk-adjusted results departed substantially from its own earlier experience.
Borrowing structures affect exposure to interest rates
Financing is another difference between smaller and larger businesses. Smaller companies often borrow to fund growth, making borrowing costs relevant to their financial performance. Higher interest rates can make that financing more expensive, although the effect depends on how a company’s debt is structured.
Large companies can issue long-term bonds to lock in borrowing costs. Smaller firms rely more heavily on bank loans and private credit, which often carry floating interest rates. Those arrangements expose borrowers to changes in rates through a different mechanism from fixed-rate debt.
Refinancing creates another point at which borrowing costs can change. A company replacing maturing debt may face different terms from those attached to its existing borrowing. This financing exposure helps explain why interest rates matter to small-cap businesses, without establishing a timetable for a recovery in their shares.
Company quality and index eligibility
Morningstar has argued that declining company quality helps explain small-cap underperformance. Its assessment treats the issue as a structural concern that may not disappear with an economic recovery, rather than assuming that stronger economic conditions alone will resolve it.
Public-market participation is part of that discussion. Businesses that remain privately held are outside public small-cap benchmarks, while acquisitions can remove listed companies from the market. These mechanisms affect which businesses are available to public-market investors, but do not establish that the strongest growth companies will always remain private.
Small-cap indexes also differ in their admission requirements. The S&P SmallCap 600 requires companies to meet profitability standards before joining. That requirement provides a specific distinction from broader small-cap benchmarks, without guaranteeing that the index will deliver higher returns.
The profitability requirement concerns eligibility at entry. It is relevant to Morningstar’s emphasis on company quality, but is separate from the historical return and risk measurements reported by Schwab and Acadian.