Investors Sticking Around Small-Caps
Whatever the reason for the lagging performance relative to large-caps, the reality is that investors haven’t been bailing out on small-cap ETFs yet, for the most part.
That could have something to do either with their faith in the outlook for the segment, or with a growing acknowledgment that ignoring small-caps, globally, is ignoring about 14% of the equity investable “opportunity” in a global scale, according to MSCI data.
IJR has now attracted $3.2 billion in fresh net assets year-to-date, while the Vanguard Small-Cap Index Fund (VB) has attracted $1.8 billion in net creations year-to-date. But IWM has faced $2.3 billion in net redemptions so far this year.
Outside of U.S. small-cap exposure, funds like the iShares MSCI EAFE Small-Cap ETF (SCZ) and the Vanguard FTSE All World (ex-US) Small Cap Index Fund (VSS) have also been net gainers, raking in about $350 million and $200 million in net inflows year-to-date, respectively.
Institutional Investors Taking Notice
Small-cap stocks haven’t typically been the realm of institutional investors, but MSCI research shows that is now changing due to four trends:
- Small-caps historically earn a premium relative to large-caps, and that size premium is true not only in the U.S. but also globally, making domestic and international small-caps attractive.
- They are good diversifiers in an all-cap portfolio. They react differently in different parts of the market cycle, and are less exposed to macro global events and more exposed to domestic events.
- They represent about 14% of the all-cap global equity market, so not owning small-caps leaves a sizable gap in a total market allocation.
- Often thought to be a good spot for active managers, the reality is that these managers have not delivered consistent outperformance in the small-cap segment. Investors today are finding that index-based market-cap-weighted small-cap strategies as well as factor-based strategies focused on size fit the bill nicely, and often at a very low cost.
In the ETF market, there are more than 100 small-cap ETFs, the biggest being IWM with $36.4 billion, and IJR with $29 billion.
But the universe is diverse, with ETFs offering exposure to U.S. small-caps, global, EAFE, emerging markets, value/growth and smart-beta small-cap portfolios, each unique in their approach to the size factor.
They can all be seen in our Small Cap ETF Channel.
Contact Cinthia Murphy at [email protected]