Small Cap ETFdb Portfolio
The Small Cap ETFdb Portfolio is designed for investors who are seeking to build a broad-based portfolio that generally avoids large cap stocks, focusing instead on smaller companies that may maintain more promising long-term growth potential. While excluding large cap securities from a portfolio entirely will limit the universe of holdings significantly, it is still possible to construct a diversified portfolio that is well rounded from both a sector and region perspective. The investment thesis behind investing in small cap stocks may be appealing to investors for a variety of reasons. From a historical perspective, small cap stocks have exhibited favorable return profiles relative to their large cap counterparts; because their operations are relatively risky, investors expect to receive additional returns over the long run to compensate for additional volatility. In 2010, IWM which tracks the performance of the small-cap segment of the U.S. equity universe, posted gains of over 25%. In that same time period the S&P 500 Index, a benchmark of large cap stocks, returned just above 12%.
There are other potential advantages to a portfolio focused on small caps. In terms of international exposure, small cap companies may be more of a “pure play” on the local economy. While large caps tend to be multinational corporations that generate revenue around the globes, small caps may be more dependent on local consumption and changes in the local economy. Toyota is a great example; while the company is headquartered and listed in Japan, it depends on U.S. sales for a significant portion of its revenues. Potentially, the connection between the positive demographic trends and growing local consumption overseas will be diminished in an investment strategy that revolves exclusively around large cap companies.
Investors should keep in mind that small cap stocks tend to have smaller customer bases, shorter operating histories, and less cash on hand, and thus they are often time far more volatile than their large cap counterparts. But because this asset class possess greater growth potential, small caps in turn also carry potential for unparalleled returns.
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