The Small-Cap Premium is Bunk

The other day, I wondered if the value premium was a thing of the past. Today, I’ll set my sights on the small-stock premium.

This is the observation that smaller-cap stocks have historically outperformed their larger peers over the long haul. I’m very suspicious on this point. It could be that smaller companies are more nimble and have a greater ability to adapt to a changing marketplace.

The problem, however, is how this is measured. We have to remember how unbalanced the stock market is. There are a small number of giant companies, and thousands of tiny ones.

When divided into size deciles, the smallest 10% of stocks comprise about 3% of the total market. That’s about the size of one mega-cap stock. It would be like looking at the long-term outperformance of one particular S&P 25 stock and claiming a premium for it.

There’s also an issue of how volatile this premium is. Here’s a look at the Russell 2000 divided by the Russell 3000. This shows that over the last 37 years, small-caps have underperformed.

For it to be a premium, I think it needs better performance than that.

There’s also a larger problem methodology. Michael Batnick relates the poor statistical foundation that the long-term returns are based on.

Posted by on November 9th, 2015 at 10:10 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.