The Russell 2000 index of small-cap stocks is up about 12 percent since the end of 2011, almost double the 7 percent gain of the large caps in the Standard & Poor's 500 index. The jump in the Russell index follows a seesaw year that closed with a decline of nearly 6 percent in 2011, after it reached a record high in April.

Analysts point to a number of reasons for the solid performance this year, including a stronger dollar, seasonal investment trends and fewer scary headlines out of Europe. The primary reason behind the gains, however, may be that the U.S. economy looks to be growing faster than the glacial pace that had been anticipated. That benefits small-caps, those companies with market caps under $3 billion and whose businesses tend to have little overseas exposure.

"You're seeing a bigger (investing) push to the domestic this year," said Bill Stone, chief investment officer at PNC Wealth Management.

Chasing a hot investment usually ends in frustration. But this could be a year in which jumping on the small-cap bandwagon - even after the double-digit gains - could still work in investors' favor.

How to play the small-cap rally.

REASONS FOR MORE GAINS

One thing small-caps have going for them: most investors are still shunning them.

Retail investors have pulled a total of $17.8 billion out of small-cap funds over 36 of the last 39 weeks, according to Bhupinder Singh, an analyst at J.P. Morgan Securities. Consistent outflows from small-caps, which are thought to be riskier investments than large-cap stocks, are more typical of investor behavior during a recession than during an economic recovery, he said.

But this trend will likely reverse if the VIX, a measure of stock market volatility, stays below 20 for a sustained period of time, and stock market correlations continue to come down, he said. The VIX is currently 17.5.

"As long the VIX remains around this level, I think you're just around the corner from seeing a significant amount of flows into equities" which will push small-caps higher, Singh said. Shares of smaller companies are more influenced by retail investor behavior than large company stocks, which sway more with moves made by institutional investors.

Renewed investor attention will likely send the Russell 2000 index up at the same pace of earnings growth, he said. Singh is expecting 20 percent earnings growth for the year, which would translate into a full-year gain of 20 to 25 percent for the Russell index if valuation multiples remain steady.

Stocks with high interest from short-sellers may be especially primed to jump if the economy continues to improve, Singh noted. JetBlue Airways, PetroQuest Energy, and Insulet Corp each have short interest of about 15 percent and each remains 20 percent or more below its target price, according to J.P. Morgan analysts.

Other stock-pickers say that small-caps still look cheap. "We are still not back to the (P/E) multiples that we saw before the financial crisis," said Ken Farsalas, co-manager of the $8.1 million Oberweis Small Cap Opportunities Fund.

Farsalas expects small-caps to gain up to 20 percent this year. Acacia Research, the top holding in his portfolio, is a leader in patent licensing. The company buys patents for technologies like 4G wireless and licenses them to companies including Microsoft Corp and Oracle Corp . Farsalas says the current price of shares underestimates the company's earning power.

"We believe that there are other major licensing deals coming in the future with companies like Apple and Google," Farsalas said.

He estimates the company will earn up to $3 per share this year, compared with consensus estimates of $2 per share, according to Thomson Reuters data.

Eric Marshall, a fund manager of the $96 million Hodges Small Cap Fund, cited corporate mergers and acquisitions as another reason for an extended small-cap rally.

"Large companies have spent the last two or three years sitting on piles of cash and under-investing in capital expenditures," he said, adding that he expects a round of acquisitions of small firms by large companies.

LOOK FOR CHEAP FUNDS

Despite the early gains, small caps are still likely to have a rocky 2012.

They "will be the leading asset class to take the brunt of the risks coming out of Europe," said Allen Kim, manager of due diligence at Genworth Financial Asset Management. In 2011 investors dumped riskier stocks first and would likely do the same if concerns about another financial crisis grow. That affects small-caps, despite little exposure to Europe.

Consider a cheap fund, then, to provide a cushion against overpaying for an investment that could have a volatile year.

The $604 million Schwab U.S. Small Cap ETF is one of the cheapest options. It charges just 13 cents per every $100 invested. The fund yields 1.15 percent.

There are other low-cost options. The $24.7 billion Vanguard Small Cap Index fund, for instance, charges 26 cents per every $100 invested. The fund yields 1.1 percent.

The iShares Russell 2000 ETF, meanwhile, also charges 26 cents per every $100 invested. It yields 1.3 percent.

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