The Problem With Small Cap Stocks

Ben Felix, Associate Portfolio Manager at PWL Capital, cautions investors against owning small cap ETFs. Despite the well-documented historical outperformance of small cap stocks over large cap stocks, recent research shows no evidence to support the existence of the size effect, leading Felix to question the value of small cap ETFs. The size premium has been shown to be weaker than other known factors such as value, profitability, and momentum, and has been found to be statistically insignificant in various time periods and regions. The implementation of a small cap strategy is also problematic, as the size effect is often concentrated in the smallest, most difficult to trade stocks.