You may have heard of companies being referred to as large or small capitalisation. Market capitalisation is a measure of size - it is the current share price times the number of outstanding shares. In Australia, large capitalisation refers loosely to stocks that have a market value of AUD7-10 billion or more, while small capitalisation refers to stocks that have a market value less than around AUD5 billion.1
In short, yes. Large and small companies have different characteristics for investors to consider.
Large Capitalisation: Benefits and Risks
These companies are typically household names that have been around for a while, such as the Commonwealth Bank of Australia, Telstra and BHP Billiton. They tend to be more stable than small companies – they may not produce triple-digit returns, but they are often less volatile during turbulent markets.
Large capitalisation companies are more liquid, meaning there are more buyers and sellers. There is also more research and data, like company financials, available for investors to review.
Small Capitalisation: Benefits and Risks
Small capitalisation companies are often new or young companies with a shorter track record. They tend to be companies with a simple operation in a single geographical location, making them easier to understand. When you consider accounting measures such as earnings or book value, small capitalisation companies are often more affordable than their larger counterparts. But the key attraction of this market segment is the growth potential small capitalisation companies offer.
This however comes with its risks. Because this is a more niche segment, there may be a lack of research and market data available. These companies may also have high business risks and tend to be thinly traded on the market. And because these are often less established companies, they can potentially be more volatile than some well-establishedlarge capitalisation stocks.
Large capitalisation and small capitalisation company segments are clearly quite distinct. Some investors try to decide which they should hold: large or small capitalisation. We think it makes more sense to decide what proportion to hold of large versus small capitalisation.
Due to the different types of benefits and risks of each segment, there is a compelling case to consider both for your portfolio, depending on your risk tolerance.
An investment in large capitalisation companies can be viewed asa solid and stable foundation to your portfolio. Small capitalisation companies can then provide an opportunity to achieve higher growth and returns, but one which comes with its risks.
Because of the risks and higher volatility, small capitalisation companies may not suit every investor, particularly those that have a shorter time horizon.
Exchange traded funds (ETFs) have become increasingly popular as a means of gaining exposure to this market segment. An ETF contains a basket of shares that tracks a specific index, providing instant diversification compared to a single share. The benefit of this means you don’t have to research and pick individual large and small capitalisation companies to invest in.
ETFs can be bought and sold on listed stock exchanges through financial advisers and brokers just like normal shares, giving investors full control and flexibility over their investment.
Investments to Get You Started
Recognised as an industry pioneer, we created the first US-listed ETF in 1993 and the first Australia-listed ETFs in 2001. Since then, we have developed a range of ETFs that provide Australian investors with the flexibility to select investments that are aligned to their investment strategy.
The S&P/ASX 50 is a core Australian index, covering the largest 50 listed securities by market capitalisation. The SPDR® S&P/ASX 50 Fund (SFY) tracks this index and can be used as a building block in portfolio construction.
The SPDR® S&P/ASX Small Ordinaries Fund (SSO) provides exposure to a diverse set of stocks and sectors in the S&P/ASX Small Ordinaries Index, which is a small capitalisation benchmark for Australian equities.
ETFs: a Low Cost, Simple, and Tax Efficient Investment for SMSFs
Typically structured like managed funds, but listed and traded on an exchange like stocks, ETFs are flexible trading and investment vehicles that can be used to help the Self Managed Superannuation Fund investor satisfy several critical investment needs.
1Source: MSCI, S&P as at 3 June 2019