Indexy a trhy
Small Caps vs. Large Caps: Is It Worth Investing in Smaller Companies?
Key takeaways
- The small-cap premium (higher returns from smaller companies) is academically documented, but in practice it comes with significantly higher volatility.
- The premium is not guaranteed — over the past 10 years large technology companies have substantially outperformed small caps.
- The Fama-French three-factor model identified small cap as a systematic return factor, not an anomaly.
- Adding a small-cap ETF to a portfolio makes sense as a long-term factor tilt, not as a short-term bet.
Small caps are stocks of companies with market capitalisation typically below $2 billion — historically they have delivered higher returns than large caps, but at the cost of significantly higher volatility and longer periods of lagging behind larger companies.
What does academic research say?
Eugene Fama and Kenneth French identified in 1992 the so-called small-cap premium — small caps historically earned approximately 1–3% more per year than large caps after adjusting for market risk. This departure is called the "size factor" in academic literature and became part of the Fama-French three-factor model. The explanation: smaller companies are riskier (less diversified, smaller access to financing), so the market naturally compensates them with higher expected returns.
Why the premium may not hold today
Since 2010 small caps have lagged the S&P 500 in many research periods. The reason: dominance of mega-cap technology (Apple, Microsoft, Nvidia). Additionally:
- After academic publication the pattern attracted capital that exploited and weakened it.
- ETFs and passive indices increased demand for large caps more than for small caps.
- The low interest-rate environment (2010–2022) favoured large companies with access to cheap financing.
Small-cap ETFs for European investors
The simplest approach is through UCITS ETFs focused on global small caps (MSCI World Small Cap) or US small caps (Russell 2000). These funds are available in the ETF overview. TERs tend to be higher than for broad-market ETFs — compare with the alternative discussed in All World vs. S&P 500, where large caps dominate.
How to include small caps in a portfolio?
As a satellite factor tilt: 10–20% of the portfolio in a small-cap ETF complements broad-market exposure with the size premium. This allocation only makes sense for investors with a 15+ year horizon who are able to endure years when small caps underperform. Do not mix with a short-term goal — small caps are volatile.
FAQ
What exactly are small caps?
Small caps are stocks of companies with market capitalisation below approximately $2 billion. Mid caps are $2–10 billion, large caps above $10 billion. The exact boundaries differ by index provider — Russell 2000 and MSCI Small Cap use slightly different criteria.
Is the small-cap premium still relevant?
The academic consensus says yes, but over the past 10–15 years the premium has been suppressed by the dominance of mega-cap technology. Long-term and across markets the small-cap premium historically exists. It requires patience and a very long horizon.
Is it better to invest in small caps directly or via an ETF?
For the vast majority of investors an ETF is better — lower costs, diversification across hundreds of companies, easy management. Direct purchase of small-cap stocks brings high transaction costs and concentrated single-company risk.