Understanding the Size Premium: Why Invest in Small Caps?
The "size premium" refers to the empirical observation that small-cap stocks historically offer higher returns than large-cap stocks. This concept was popularized by the work of Eugene Fama and Kenneth French, notably in their famous three-factor model. According to their research, over the long term, small caps have generated an average outperformance of around +3% per year compared to large caps, compensating for their higher volatility and lower liquidity.
This premium is explained by several factors: higher risk related to size and lower diversification of smaller companies, more frequent market inefficiencies, and greater growth potential. However, this outperformance is neither guaranteed nor linear over time.
The Lyxor MSCI World Small Cap UCITS ETF (LU1275219762): Global Exposure to Small Caps
For investors wishing to capture this size premium within a diversified portfolio, the Lyxor MSCI World Small Cap UCITS ETF is a relevant solution. Its ISIN code is LU1275219762, and it features a TER of 0.35%, competitive for a global small-cap ETF.
This fund replicates the MSCI World Small Cap index, which includes over 4,000 companies across 23 developed countries. The average market capitalization of the underlying securities ranges between 500 million and 2 billion euros, confirming the focus on global small caps.
Geographical and sector diversification is a major advantage, as it reduces specific risk related to a given region or sector. Moreover, the ETF’s physical replication allows full transparency on the held assets.
The Size Premium: Still Relevant? Analysis of Persistence Since 2000
While the size premium is well documented over the long term (since the 1920s in the United States), several studies have shown that it has faded or even disappeared since 2000. The reasons are multiple:
The internet bubble and successive crises heavily impacted small caps, resulting in very volatile performances.
The rise of large technology companies concentrated growth in large caps.
Markets have become more efficient thanks to technology and information dissemination.
The table below compares the average annual performance (in euros, dividends reinvested) of the MSCI World Small Cap and MSCI World Large & Mid Cap indices over the last 10 years (2014-2023):
Index
Average Annual Performance (2014-2023)
Annual Volatility
MSCI World Small Cap (EUR)
8.2%
18.5%
MSCI World (Large & Mid Cap) (EUR)
9.0%
14.2%
During this recent period, the size premium did not materialize, with large caps outperforming and exhibiting lower volatility.
Volatility and Liquidity: Specific Risks of Global Small Caps
Investing in small caps implies accepting higher volatility. Historically, during crisis phases, small caps can experience swings of 30 to 40%, significantly higher than large caps. This amplitude is notably explained by:
Lower liquidity: traded volumes are smaller, leading to wider bid-ask spreads and greater sensitivity to large orders.
Greater exposure to domestic economy and specific risks, with less diversification.
For example, during the COVID-19 crash in March 2020, the MSCI World Small Cap index dropped nearly 40% in a few weeks, compared to about 30% for the MSCI World Large & Mid Cap.
Comparing Small Cap ETFs: Global and US Focus
To complement a global small-cap allocation, it is interesting to also consider ETFs focused on US small caps, which represent a significant portion of the global small-cap market capitalization and benefit from higher liquidity.
The Amundi Russell 2000 UCITS ETF (ISIN: FR0010870992) replicates the Russell 2000 index, concentrated on US small caps. It features a TER of 0.25% and a large assets under management, ensuring high liquidity.
Here is a summary comparison table of the two ETFs:
ETF
Replicated Index
ISIN
TER
10-Year Performance (Average Annual)
Geographical Area
Lyxor MSCI World Small Cap
MSCI World Small Cap
LU1275219762
0.35%
8.2%
Global (23 developed countries)
Amundi Russell 2000 UCITS ETF
Russell 2000
FR0010870992
0.25%
9.5%
United States
How to Integrate Small Caps into Your PEA or CTO Portfolio?
Given the volatility and specificities of small caps, it is advisable to use them as a satellite component within a diversified portfolio. An allocation between 10% and 20% allows exposure to the size premium without bearing all the associated risks.
For French investors, the Lyxor MSCI World Small Cap is accessible via CTO (Ordinary Securities Account) because it is a UCITS ETF not eligible for the PEA (shares outside the eurozone). An alternative to gain exposure to European small caps eligible for the PEA would be the Amundi MSCI Europe Small Cap UCITS ETF (ISIN: FR0010688192), although its universe is more limited.
Finally, as a complement, the Amundi Russell 2000 ETF is also accessible via CTO and allows increasing exposure to US small caps, often a driver of overall performance.
Conclusion: The Size Premium Remains an Opportunity, But With Caution
The size premium, although historically established, is not a guaranteed constant. Since 2000, global small caps have experienced more volatile and sometimes inferior performance compared to large caps. However, in the long term, they represent an interesting growth lever, notably due to their innovation and development potential.
The Lyxor MSCI World Small Cap UCITS ETF (LU1275219762) offers diversified and cost-effective exposure to this segment, allowing integration of the size premium into a diversified portfolio. Combined with a moderate allocation (10-20%), it can improve risk-adjusted performance.
To fully capture this premium, it is also relevant to complement with US small caps via the Amundi Russell 2000 ETF (FR0010870992), benefiting from superior liquidity and market depth.
In summary, small caps are a segment to consider seriously, with attentive risk management and geographical and sector diversification.
Disclaimer: This article is provided for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Before investing, it is recommended to consult a financial advisor and assess your risk profile.
