“From its inception in November 2009 through December 2017, the fund bested the small-blend category average by 1.6 percentage points annually with similar risk,” according to Morningstar. “Much of this outperformance can be attributed to the fund’s persistent low-cost advantage. Because this index fund is always fully invested, it may suffer deeper drawdowns than the average fund in the category during bear markets. But its smaller cash drag should pay off during bull markets.”
Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.
As the broad equities market pushes toward new highs, riskier assets like small-caps have been able to rally back much quicker. When the economy is doing well and the markets rally, we see sentiment for more nimble smaller companies improve and outperform those of their more languorous, larger peers
For more information on the small-cap segment, visit our small-cap category.