Small Cap Effect
Process:
Over long periods of time, smaller capitalization stocks have historically outperformed larger capitalization stocks.
Where liquidity, diversification concerns and other factors allow, we look to bias some Fair Weather Strategies' portfolios to ETFs that track smaller capitalization stocks as opposed to larger ones.
Research:
Marc Reinganum ranked all stocks listed on the New York and American Stock Exchanges from 1963 through 1980 into deciles based on their market capitalization at the beginning of each year. Investing in the decile containing the smallest capitalization stocks would have resulted in a cumulative return more than ten times greater than that achieved by investing in the decile containing the largest capitalization stocks!
Fama and French, in their whitepaper “Common risk factors in the returns of stocks and bonds” identify the small cap effect as one of only three factors that are significant determinants of a stock’s returns. (The other two factors are overall stock market direction and the value effect).
Past performance is no indicator of future return. There is no guarantee that applying a moving average strategy will either increase your portfolio’s return or lower its volatility as compared to any other strategy. Some securities and market environments are particularly unsuitable for trading using a moving average system. A moving average strategy will likely incur higher commissions than a buy and hold strategy and may or may not increase your taxes relative to buying and holding.