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Justin Kuepper

Small Cap Premium Could Expand

By February 7, 2013

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Small cap stocks - including international small cap stocks - have consistently outperformed large cap stocks over the long-term, according to several academic studies. In recent times, some academics have questioned these trends, but evidence has shown that the trends are in-fact continuing, with small cap stocks trading at durable premiums.

The Russell 2000 index of small cap stocks has strongly outperformed the S&P 500 so far this year, with P/E multiples of around 15x compared to 13x for the benchmark index. With large caps experiencing peak earnings and small caps trading with historically low operating margins, this premium could expand over the coming quarters making small caps even more attractive.

International investors may therefore want to explore ETFs like the SPDR S&P International Small Cap ETF (GWX), which offers exposure to 15 different countries and more than 800 equities spread between them. Domestically, investors should look at the Vanguard Small Cap Value ETF (VBR) that focuses on value investments in the asset class.


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