Adding mid- or small-cap exposures to a portfolio, over long periods of time, has tended to change the overall risk and return picture. Benchmark-aware portfolio managers may be attracted to the enhanced return potential of mid and small caps, but they may also be leery of the added risk, or “size bet,” they assume by adding these exposures. But we’ve found that by using certain smart beta indexes, investors can employ mid- or small-cap strategies without taking a size bet relative to a benchmark. The table below illustrates this point:
Using Smart Beta Indexes without Making Size Bets
For definitions of terms and Indexes in the chart, visit our glossary.
• How Large is LARGE? In this table, a greater negative number in the size factor column indicates greater exposure to large-cap stocks. The MSCI EAFE Index comes in at -0.156, thereby setting the bar. The WT DEFA Index comes in at -0.230, while the WT International Large Cap Dividends comes in at -0.364, or more than twice as exposed to large caps as the MSCI EAFE Index.
• Adding 9%–45% Weight to Mid or Small Caps to Match MSCI EAFE: The fact that the WT DEFA and the WT International LargeCap Dividend are so large means that we can add anywhere from 9% to 45% exposure to mid- or small-cap stocks, defined by blends with the WT International MidCap Index or the WT International SmallCap Index. The important thing is that we can do this without taking any size bet relative to the MSCI EAFE Index, based on the returns exhibited over the period of time represented by the table, June 1, 2006, through June 30, 2014. We believe that it is beneficial to think in this manner because adding small or mid-caps can build a more complete exposure to a particular region, not to mention that all of the blends outperformed the MSCI EAFE Index over this period.
– Blending with WT Int. LargeCap Dividend: It’s clear that this Index is the largest, so when it is used as the foundation of a blend, it allows the use of 45% weight toward the WT International MidCap Dividend Index or 23% weight toward the WT International SmallCap Dividend Index while maintaining the same overall size exposure as the MSCI EAFE Index. The 45% weight toward mid caps certainly contributed to the 5.51% average annual return—the best of all blends shown in this table.
– Blending with WT DEFA: This Index isn’t quite as large as the WT International LargeCap Dividend and does include exposure to large-, mid- and small-cap size segments. Still, we have the flexibility to add 23% exposure to the WT International MidCap Dividend Index or 9% to the WT International SmallCap Dividend Index without taking a size bet relative to the MSCI EAFE.