No. of Recommendations: 1
What I heard is that company size is not a factor in performance. It was Wes Grey of Alpha Archtitect who said this. I was always taught that small cap value did the best. If you strip out the 5 largest value stocks, large cap value and small cap value do the same. There was a very famous paper written in about 1991, that stated that 3 factors, size, value and equity account for stocks out performance. This was very surprising to me to hear.
No. of Recommendations: 5
Can you always expect higher returns from a basket of small-cap stocks? No. Since 2008, there has been much higher correlation between small caps and large caps, and the 30-year return was very similar: 9.70% and 9.85%. ETFs have made it easy to invest in small-caps and so the returns have become highly correlated with the market.
https://www.portfoliovisualizer.com/asset-correlat...But there have been periods of outperformance. Small caps outperformed from 2000 to 2016: 8.8% CAGR vs market's 5.4%. Big companies can make terrible decisions about accounting or risk management, and are subject to group think.
https://www.portfoliovisualizer.com/backtest-portf...Market cap can be part of an investment decision. Overall, the company size effect might average out to zero, but there are situations when company size helps and times when it hurts.
No. of Recommendations: 6
Separating small caps from large caps as a distinct asset class, and monitoring their trends separately on both an absolute and relative basis is a critical part of intermediate global tactical asset allocation.
It's simple to do, allows monthly allocation decisions to be made, and can be done with a number of diversified, customized or leveraged ETFs at very low to low expense. IWM is the best known but the most expensive for US small caps; others include IJR, IJT for sc growth specifically, SC value ETFs, SC momentum, etc.
Going up on the risk (but better on the value) spectrum, there is the well-known SCZ for EAFE-small caps, and then others for EM smallcaps but those are getting pretty far down in size, visibility and higher in risk.
FC
