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.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.