Big-Caps, Big Questions

Bigger hasn't been better for stocks this year, as the widely predicted rotation from small-cap to large-cap leadership has failed to materialize.

But analysts say investors will only suffer greater frustration if they purge their large-cap holdings and abandon the concept of asset allocation.

There is a firmly held belief among analysts that small- and mid-cap stocks, or companies with market capitalizations below $10 billion, outperform large-caps in the early stages of an economic recovery due to their flexibility. In the case of the most recent recovery, that view has borne out as small-cap returns have walloped those of the heavyweights. The iShares S&P SmallCap 600 Index (IJR Quote) exchange-traded fund rose 38.5% in 2003, more than 10 percentage points better than the SPDR (SPY Quote) ETF, which tracks 500 of the largest companies in the U.S. ...