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Stock markets retreated in September. Large-cap U.S. funds held up best in the sell-off and for the quarter, while small-cap, value and international funds, lost more for the month and gave back all of their gains for the quarter.

There’s been an unusually large divergence between large- and small-caps. This began in mid-March and it’s now affecting the ranks in my NoLoad FundX newsletter in a big way. Most large-cap growth funds have outsized gains for the year while many small-caps are barely positive. In fact, small-caps are now in correction territory, suffering their second 10% loss this year.

Riding the Large-cap Wave

NoLoad FundX’s portfolios have shifted dramatically in the last year. In October 2013, the portfolio was primarily invested in leading small- and mid-cap funds, but as market leadership favored stocks of mega-sized companies, the portfolio became increasingly focused on large-cap funds. I share some of our recent trades in the following video.

Leading large-cap funds include both actively managed funds like Dodge & Cox Stock (DODGX) and index-based ETFs like iShares S&P 100 (OEF). Vanguard Mega Cap 300 Growth (MGK) and Guggenheim S&P 500 Pure Growth (RPG) .

PowerShares QQQ (QQQ). which tracks the NASDAQ 100, is another leading large-cap fund. QQQ has 58% of its portfolio in technology, so it’s on the more aggressive side. I suggest taking smaller positions in concentrated funds like QQQ.

Large-caps Won’t Lead Forever

While large-caps are currently in favor, they won’t lead forever. Markets change, and historically there have been years when large-caps were the place to be and years when small-caps outperformed. The chart below looks at periods of small- and large-cap leadership from 1991 through 2012.

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These leadership cycles typically lasted many years–large-caps outperformed small-caps for nearly six years from 1996 to 2001, and then small-caps dominated for seven years from 2001 to 2007. These are the sort of enduring trends that investors should seek to take advantage of.

Some investors hold both small-caps and large-caps, hoping their portfolios will participate when large-caps are in favor and also when small-caps are in favor. But the trouble with this approach is that it’s hard to continue holding small-caps when they are badly lagging large-caps, and it’s hard to continue holding large-caps during the years when small-caps are leaping ahead. I believe a better approach is to adapt to market changes.