Insights

Size or Value? Investors Can Benefit from Both in a Recovering Economy

  • Smaller stocks (by market capitalisation) have led the equity market rally year to date, across all major regions, but most notably in the US and Europe.
  • As businesses reopen in 2021, small cap stocks should benefit from their sensitivity to the real economy and higher domestic focus.
  • SPDR® ETFs offer investors a complete suite of small cap stock exposures, including Value-Weighted Small Cap strategies for the US and European equity markets.

Small cap companies outperforming in 2021

Global equity markets have had a strong start to 2021, with all major regional indices trading positive as we near the end of Q1. While much of the headline attention in the US market is paid to the mega cap FAANG stocks, the strongest performing strata of the market capitalisation (“cap”) spectrum has been indices that focus on small cap stocks.

In the US, the Russell 2000 Index – which consists of stocks with a market cap below $10 billion – has been on a tear. Year to date, the Russell 2000 is up 15.88% overall. That is an 11.25% outperformance of the more closely followed S&P 500 Index, which is comprised of large and mega cap stocks. European equities have a similar story to tell. The MSCI Europe Small Cap Index is up 9.06% overall, which is a 1.5% better than the MSCI Europe Index.1

In 2020, smaller businesses suffered disproportionately from the negative impacts of the global pandemic, both in terms of the short-term business disruption and the longer-term threat to financial viability. Investors exposed to a broad large cap index – like the S&P® 500 Index – when the pandemic hit, would have benefitted from the diversification toward stocks like the FAANGs (e.g. Technology stocks supporting the digital economy). The bigger balance sheets of large cap stocks also allowed many to take advantage of the depressed interest rates to expand their capacity to withstand a prolonged recession in consumer activity. Small cap stocks would have also benefitted from this, but at a much smaller scale. Bottom line, small cap stocks generally suffered from deeper discounting as a result of the global pandemic. This all changed in November of 2020, when key announcements surrounding promising vaccine developments caused this ‘discounting’ effect to reverse.

While much of the small cap rally observed this year can be attributed to a reversal of the pandemic discount, we believe there is more room to run. As business activity resumes, and even ramps up, the traditional behaviour of small cap stocks in recovery should take hold. The same mechanisms that made smaller businesses more fragile on the way down should make them more leveraged on the way up. Similar tailwinds exist for Value stocks, which have followed a similar trajectory to small caps, albeit at a more modest magnitude. In March, we have seen Value begin to catch up with small caps, and investor sentiment suggests both exposures will have more capacity to rally.

How to play this theme

Investors looking to add exposure to small caps can do so with SPDR ETFs. To learn more about these ETFs, and to view full performance histories, please follow the links below.

SPDR® Russell 2000 U.S. Small Cap UCITS ETF
SPDR® MSCI Europe Small Cap UCITS ETF

How can investors benefit in this environment playing Size and Value?

European Investors have already begun to position for the environment described above, with significant flows going into ETFs that provide exposure to the Size (small caps) and Value factors. Investors seeking to add both to their portfolio should consider a Small Cap Value Weighted Index that provides significant exposure to both the Size and Value factors (see Figures 1 USA and 2 Europe). SPDR® ETFs provide a way to play these indices. To learn more about these ETFs, and to view full performance histories, please follow the links below.

SPDR® MSCI USA Small Cap Value Weighted UCITS ETF
SPDR® MSCI Europe Small Cap Value Weighted UCITS ETF

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Flows


European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)

European-Domiciled ETP Asset Category Flows ($mn)

Source: Bloomberg Finance L.P., for the period 11-18 March 2021. Flows are as of date indicated and should not be relied upon as current thereafter. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.