Companies around the world come in all shapes and sizes, and one size definitely does not fit all portfolios. For the most effective investing in asset class exchange traded funds (ETFs) for your clients, it’s important to understand how economic conditions and other events impact corporations of different sizes. We’ve covered large-caps and mid-caps; now it’s time to talk small-caps.
What’s a Small-Cap?
Different index providers vary on their definition of “small cap” stocks. The S&P, for instance, categorizes small-caps as companies with a market capitalization of $300 million to $1.5 billion.
Small-caps are no tiny part of the market. In fact, small-cap companies make up roughly 10% of the total U.S. equities market.
Unlike large-caps, which often are internationally-known brands, small-caps are companies that investors are less likely to have heard of. But like emerging markets, small-caps are companies that have the potential to grow into something more. Those who get in on the ground floor will reap the rewards of that growth if it happens.
The Benefits of Small-Caps
While larger companies boast stability, small-caps make up for their lack of it by being far more nimble.
Smaller companies can easily adapt and make fast and effective decisions as compared to their larger, more bulky counterparts. This is also one of the reasons why small companies and small-cap ETFs are expected to perform better after a recession. Changing economic conditions and market demands require fast action and an ability to change gears seamlessly; small-caps can do this more easily than large corporations, which often have several layers of bureaucracy to work through.