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Technological evolution

The large advantages of small companies

04 Sep 2018
Christopher Gannatti, Head of Research


Small companies are quite easy to ignore. After all, analysts rarely cover them, you may not have heard of them, and you are unlikely to have their products in your home. However, small companies are often the ones that offer the biggest potential.

 

Consider that small companies are innovative. They are creating the products, services and technologies we may not know today, but will come to rely on tomorrow. Certainly, they come with more risk, but they also come with more reward potential. In fact, over the long-term, small cap stocks have outperformed both their large cap brethren and the market in general, as you can see here.

 

Behold the power of small cap stocks in the Eurozone

 

Sources: Bloomberg, MSCI, 31 December 2000 to 31 July 2018 You cannot invest directly within an Index.

Historical performance is not an indication of future performance and any investments may go down in value.

 

The dividends of small caps

 

Additionally, it is worth noting that, in addition to their growth potential, small companies in Europe often pay dividends. Dividends provide:

  • A potentially growing stream of income
  • A measure of protection in down markets

In the Eurozone a focus on dividends provided risk mitigation during a tough market (31 March 2000 to 31 March 2003)

 

Sources: Bloomberg, MSCI, 31 March 2000 to 31 March 2003. Includes Backtested Data. The MSCI EMU High Dividend Yield Index began live calculation on 31 October 2006.

You cannot invest directly within an Index. Historical performance is not an indication of future performance and any investments may go down in value.

 

Capturing inefficiencies

 

We believe that small companies can provide growth opportunities to investors. Further, we believe that small cap dividend payers may help to mitigate the volatility of small cap investments. It is worth noting that, as small companies are not as widely followed as their larger counterparts, there is more opportunity for a stock’s price to be out of alignment with the company’s true value. 

 

At WisdomTree, we weight indices by dividend in order to magnify the effect dividends have on performance. We use a rules-based process and rebalance back to relative value at least annually. In our opinion, less efficient markets, like the small cap arena, are precisely where our rules-based process can work best.
In our next instalment, we’ll discuss where small cap opportunities may be most exciting.


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Technological evolution, Small Cap


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This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

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