The Size Premium in Europe: Small Caps vs Large Caps Over 30 Years
For three decades, European small and mid-cap stocks have delivered annualized returns superior to those of large caps. According to the MSCI Europe Small Cap index, the average annual performance over 30 years (1993-2023) is approximately +9.5% compared to +6.3% for the MSCI Europe Large Cap, representing a size premium of about +3.2% per year (Bloomberg).
This outperformance translates into a 19.7-fold increase in invested capital in small caps, versus about 7.4 times for large caps over the same period. However, this size premium comes with significantly higher volatility, roughly +40% greater: the average annual volatility of small caps is 22% compared to 15.7% for large caps (MSCI, Bloomberg).
Volatility Analysis: A Risk/Return Trade-off
The higher volatility of European small caps is explained by several factors: lower liquidity, increased sensitivity to economic cycles, and greater exposure to domestic markets. For example, during the financial crises of 2008 and 2020, small caps fell by -55% and -45% respectively, compared to -40% and -35% for large caps (Bloomberg).
Conversely, during economic recovery periods, small caps exhibit stronger rebounds, with gains of +35% to +45% over 12 months, compared to +20% to +30% for large caps. This pattern creates windows of outperformance often linked to macroeconomic dynamics and market cycles.
Windows of Outperformance: Tactical Opportunities for Investors
Analysis of quarterly data over 30 years shows that small caps outperform large caps about 60% of the time, with peaks in outperformance during economic recovery phases (INSEE, Banque de France). For example, between Q2 2009 and Q2 2010, European small caps outperformed large caps by +18 percentage points.
These windows are often correlated with credit recovery and improvements in business confidence indicators, sectors where SMEs and mid-sized companies are more sensitive. Tactical investors can therefore exploit these phases to increase their exposure to small caps.
Investment Instruments: Small and Mid Cap ETFs Eligible for the PEA
For French retail investors, access to European small and mid caps is facilitated by several ETFs eligible for the Plan d’Épargne en Actions (PEA). These vehicles offer diversification, liquidity, and reduced fees. Some popular ETF examples:
ETF
Underlying Index
Annual Fees
PEA Eligibility
Assets (€ m)
Amundi MSCI Europe Small Cap UCITS ETF
MSCI Europe Small Cap
0.25%
Yes
450
Lyxor MSCI Europe Mid Cap UCITS ETF
MSCI Europe Mid Cap
0.30%
Yes
320
Xtrackers MSCI Europe Small Cap UCITS ETF
MSCI Europe Small Cap
0.30%
Yes
280
These ETFs provide access to a diversified universe of several hundred securities, thereby limiting company-specific risk while capturing the size premium.
Conclusion: The Size Premium Justifies a Dedicated Allocation Under Conditions
The size premium in Europe is a proven phenomenon, with an annualized outperformance of about +3.2% over 30 years for small caps compared to large caps. However, this premium comes with higher volatility (+40%) and periods of underperformance that can last several quarters. Using PEA-eligible ETFs allows French investors to incorporate this exposure with a long-term perspective while benefiting from favorable taxation.
Actionable Recommendation: an allocation of 10 to 20% in European small and mid caps, adjusted according to risk profile, can improve the expected portfolio return. It is advisable to increase this allocation during economic recovery phases, identifiable through French and European macroeconomic indicators (INSEE, Banque de France), to maximize capture of the size premium while managing volatility.
