Small caps offer investors pros and cons

Article Excerpt

Smaller firms can sometimes generate higher returns than their larger counterparts, but they can be riskier, less liquid, and may underperform for long periods. One way to offset some of the risk is to focus on ETFs that hold top-quality small-capitalization companies (such as the iShares EAFE Small Cap ETF. See this page). Some studies show that small cap stocks, as a group, have outperformed their larger peers over time. In fact, U.S. small-cap stocks beat large-cap stocks by around 1.8% per year between 1926 and 2019. However, small companies have lagged large-cap stocks on U.S. markets over the past 5 years. In Europe and Asia, the opposite happened: smaller companies beat large companies. Within the broad group of publicly listed small companies, there will be numerous losers that will detract from the overall portfolio performance. However, theoretically, the winners have unlimited potential for gains, and they invariably make up for the losers, which can lose “only” 100% of their equity value…