Small/Mid Cap Factors: a PM’s Guide: Low Quality outperformance just became a three standard deviation event

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Small/Mid Cap Factors: a PM’s Guide: Low Quality outperformance just became a three standard deviation event

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Small/Mid Cap Factors: a PM’s Guide

Low Quality outperformance just became a

three standard deviation event

Small Cap

Tough May? You weren’t alone (Risk/Low Quality month) 17 June 2026

Only 17% of small cap active funds (and 29% of mid cap funds) outperformed in May Small Cap Research

(see Fund perf. note), where leadership within the Russell 2000 was marked by Low United States

Quality (which beat High Quality by 9ppt in May/13ppt YTD) and Risk (which led Low

Risk by 7ppt in May/12ppt YTD). Top factors in both small and mid caps were Price Vol. Jill Carey Hall, CFA

and Beta; Momentum was also among the best mid cap styles despite lagging in small Equity & Quant Strategist

caps. And Growth factors saw better returns than Value factors within both small & mid. BofAS+1 646 855 3327

Low vs High Quality now a 3 Std Dev event (like Feb. ’00) jill.carey@bofa.comTrey Brown

Low Quality rallies lasting 1yr+ are rare, where the only prior occurrences before today Equity & Quant Strategist

BofAS

were leading into the Tech Bubble and the recoveries post-Tech Bubble/GFC/COVID. We +1 646 855 2689

cautioned last year/early this year that the Low Quality rally could have more room to harold.brown2@bofa.com

run (see Year Ahead & factors note): outperformance was much less dramatic than the

Tech Bubble, valuations weren’t extended and retail trading (which buoyed many Low Exhibit 1: Outperformance of low

Quality stocks) was supported by tax refunds/stimulus. Now, Low vs. High Quality 12m quality within small caps is now a 3

performance (on ROIC) has hit a 3 standard deviation extreme (Exhibit 1), close to Feb. standard deviation event