Large-cap vs small-cap portfolio performance: new empirical evidence from ETFs

Abstract

Purpose

A well-documented pattern in the literature concerns the outperformance of small-cap stocks relative to their larger-cap counterparts. This paper aims to address the “small-cap versus large-cap” issue using for the first time data from the exchange traded funds (ETFs) industry.

Design/methodology/approach

Several raw return and risk-adjusted return metrics are estimated over the period 2012-2016.

Findings

Results are partially supportive of the “size effect”. In particular, small-cap ETFs outperform large-cap ETFs in overall raw return terms even though they fail the risk test. However, outperformance is not consistent on an annual basis. When risk-adjusted returns are taken into consideration, small-cap ETFs are inferior to their large-cap counterparts.

Research limitations/implications

This research only covers the ETF market in the USA. However, given the tremendous growth of ETF markets worldwide, a similar examination of the “small vs large capitalization” issue could be conducted with data from other developed ETF markets in Europe and Asia. In such a case, useful comparisons could be made, so that we could conclude whether the findings of the current study are unique and US-specific or whether they could be generalized across the several international ETF markets.

Practical implications

A possible generalization of the findings would entail that profitable investment strategies could be based on the different performance and risk characteristics of small- and large-cap ETFs.

Originality/value

This is the first study to examine the performance of ETFs investing in large-cap stock indices vis-à-vis the performance of ETFs tracking indices comprised of small-cap stocks.

Citation

Rompotis, G. (2019), "Large-cap vs small-cap portfolio performance: new empirical evidence from ETFs", Review of Accounting and Finance, Vol. 18 No. 1, pp. 71-94. https://doi.org/10.1108/RAF-03-2017-0056