Are Small-Cap ETFs As Lucky As Actively-Managed?

Do small-cap stock pickers actually possess certain insight, or do they just have a better chance of beating their benchmarks than large-cap stocks. Could this be true of small-cap exchange traded funds (ETFs) too? Eleanor Laise for The Wall Street Journal remarks during this long-running debate between indexing and active management, one bit of old-fashioned wisdom remains constant-that active managers of small-stock portfolios have a  better chance of beating their benchmarks than do large-cap specialists. Larger companies are so scrutinized and followed by Wall Street pros that a stock-picker doesn’t always have the chance to uncover small treasures. The theory points to the idea a small cap stock picker can discover lesser-known, overlooked bargain-priced stocks and therefore, beat their benchmarks.

The long-term performance of actively managed small-cap mutual funds appears to support that theory when compared to the Russell small-cap indexes, but not with other indexes. If small-caps were so stock-picker friendly and active managers so talented, the odds of beating the market every year would be high.

Regardless, investors have been under-allocated in small-cap stocks for a long time. Even though we’re in the seventh year of small-cap stocks outperforming large-cap stocks, it doesn’t appear the trend is changing anytime soon as the Russell 2000 hit an all time high today.