Size factor
TheoryDefinition
The historical tendency of small-cap stocks to outperform large-cap stocks. Documented by Rolf Banz (1981) and popularized in Fama-French (1992).
Historical premium: ~2–3% per year, but the weakest and most fragile of the major factors. Much of the size premium disappears once you exclude the smallest, least-liquid micro-caps. The premium has been inconsistent since the 1980s.
Small-caps have higher volatility, higher leverage on average, and greater dependence on the domestic economy — so they swing harder in recessions and growth regimes.
Historical premium: ~2–3% per year, but the weakest and most fragile of the major factors. Much of the size premium disappears once you exclude the smallest, least-liquid micro-caps. The premium has been inconsistent since the 1980s.
Small-caps have higher volatility, higher leverage on average, and greater dependence on the domestic economy — so they swing harder in recessions and growth regimes.
Example
IJR (S&P SmallCap 600) vs. IVV (S&P 500) over 2001–2023: IJR returned ~10% CAGR, IVV ~8% — but IJR also suffered larger 2008 and 2022 drawdowns. The premium showed up, but only for investors who stomached the volatility.
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