Revisiting Small Caps

As the world economy starts to feel the benefits of COVID-19 vaccines, some investors have started to revisit the role of small-cap stocks in their portfolios. Traditionally seen as riskier than mid- and large-cap stocks, small caps have historically been more sensitive to a benign economic backdrop.

Over the one-year period ended March 31, 2021, all major regional MSCI indexes underperformed their small-capitalization counterparts, with the exception of emerging markets. We saw the greatest outperformance in the U.S. where the MSCI USA Small Cap Index outperformed the MSCI USA Index by 35.8%. This strong performance of U.S. small caps comes on the back of a gradual re-opening of the economy and extensive vaccination program.

As of that same date, the MSCI’s adaptive multi-factor model showed a continued overweight of the low-size factor, as well as value.

If we take a longer view, as shown in the chart below, we find that on a five-year rolling basis, over the last 20 years, the small-cap regional indexes outperformed the large- and mid-cap indexes most of the time.1