Bridgeway recently provided a nice review of the historical small-cap effect:
The Center for Research in Security Prices (CRSP) divides all stocks traded on the New York Stock Exchange into 10 deciles based on company market capitalization. Decile 1 includes the largest of all companies, while decile 10 represents the smallest of small-cap stocks, known as ultra-small companies.
Some observations:
- From 1926-June of 2015, small-cap stocks (CRSP 6-8) outperformed ultra-large stocks (CRSP 1) by 2.98% annually
- Small-cap stocks (CRSP 6-8) outperformed ultra-large stocks (CRSP 1) in 6 out of the 10 periods shown in the above table
- Markets go through extended periods of time favoring large-cap stocks vs. small-cap stock and vice versa
This data suggests that there can be meaningful benefits from including small-cap exposure as as part of an asset allocation. Of course, our personal preference for how to get that small-cap exposure is through a disciplined relative strength index.
A look at the chart of our own PowerShares DWA Small Cap Momentum ETF is shown below:
As of 9/8/15. This PnF chart is constructed using closing prices only. The performance above is based on pure price returns, not inclusive of dividends or all transaction costs.
A brief review of the index construction methodology for the PowerShares DWA Small Cap Technical Leaders Index:
The PowerShares DWA Small Cap Momentum Portfolio (Fund) is based on the Dorsey Wright® SmallCap Technical Leaders Index (DWA SmallCap Technical Leaders Index). The Fund will normally invest at least 90% of its total assets in equity securities of small capitalization companies that comprise the Index. The Index includes securities pursuant to a Dorsey, Wright & Associates, LLC proprietary selection methodology that is designed to identify companies that demonstrate powerful relative strength characteristics based on that company’s market performance. Approximately 200 companies are selected for inclusion in the Index from the NASDAQ US Benchmark Index. The Fund and the Index are rebalanced and reconstituted quarterly.
The stock market correction over the past month or so caused this chart to pull back to its bullish support line, but it has since reversed back into a column of X’s. In light of the fact that many of the short-term indicators that we follow at Dorsey Wright (NYSEHILO and TWNYSE) have reached oversold levels-even multi-year low levels, investors may wish to consider taking this opportunity put some money to work in this ETF.
Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. Dorsey Wright is the index provider for DWAS and a suite of other Momentum ETFs with PowerShares.
