For instance, market capitalization eligibility varies by index, nonetheless, it ranges from US$ 1.0 billion to US$ 6.7 billion for the S&P SmallCap 600.
Let’s say the index contains 600 small-cap companies when it first launches. As these companies thrive and expand, the index likewise does. However, eventually, some of the top growers surpass the upper market cap threshold and are removed from the index, to be replaced by new small-cap firms. At that point, you no longer gain access to the best-performing companies in the index.
Is it really a gamble that the majority of tiny businesses expand at the quickest rate and that, once they get too large, they are abandoned because it’s thought that their growth would slow down?
Smaller companies typically have higher discount rates on their future cash flows, which suggests that they offer higher expected returns. If these companies are removed from the index, it’s not a big deal. Historically, over the past 30 years, investing in small-cap value stocks has outperformed the market, as demonstrated by Dimensional’s small-cap value fund DFSVX.
I plan to buy a lot of lottery tickets because they have significant potential. If any of them win, I will sell them to buy even more tickets since once a ticket wins, it no longer holds that potential. Who cares if I don’t keep the winners? Historically, consistently buying lottery tickets has outperformed the market.
The original point is valid. Your perspective is based on past performance. You want to buy and hold small caps that grow over time. An ETF that removes its winners won’t outperform the market, and in fact, it’s designed not to.
Oh, they just need to eat their greens, hit the gym, and dream big, But in all seriousness, diversification and the inherent growth potential of emerging companies can drive their long-term success.
