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The 'Small-Cap Effect' Isn't Dead, After All


Jan. 8, 2021 8:58 pm ET
Contrary to reports in recent years that the small-cap effect has disappeared, it’s actually alive and well. We’ve just been looking for it in all the wrong places.
The small-cap effect refers to the long-term tendency of small-capitalization stocks to outperform the large-caps. Since the mid-1920s, according to data from Dartmouth finance professor Kenneth French, the 10% of stocks with the smallest market caps have beaten the largest 10% of stocks by an annualized margin of 2.4 percentage points.
Much of the past two decades have been an exception to this long-term pattern, however. Over the past 15 years, for example, the Russell Microcap Index (containing 2,000 of the tiniest exchange-listed stocks) lagged behind the Russell Top 50 Mega Cap Index (containing the 50 largest-cap stocks) by 2.5 annualized percentage points. ....

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