Large-cap vs small-cap portfolio performance : new empirical evidence from ETFs

Purpose: A well-documented pattern in the literature concerns the outperformance of small-cap stocks relative to their larger-cap counterparts. This paper aims to address the “small-cap versus large-cap” issue using for the first time data from the exchange traded funds (ETFs) industry. Design/methodology/approach: Several raw return and risk-adjusted return metrics are estimated over the period 2012-2016. Findings: Results are partially supportive of the “size effect”. In particular, small-cap ETFs outperform large-cap ETFs in overall raw return terms even though they fail the risk test. However, outperformance is not consistent on an annual basis. When risk-adjusted returns are taken into consideration, small-cap ETFs are inferior to their large-cap counterparts. Research limitations/implications: This research only covers the ETF market in the USA. However, given the tremendous growth of ETF markets worldwide, a similar examination of the “small vs large capitalization” issue could be conducted with data from other developed ETF markets in Europe and Asia. In such a case, useful comparisons could be made, so that we could conclude whether the findings of the current study are unique and US-specific or whether they could be generalized across the several international ETF markets. Practical implications: A possible generalization of the findings would entail that profitable investment strategies could be based on the different performance and risk characteristics of small- and large-cap ETFs. Originality/value: This is the first study to examine the performance of ETFs investing in large-cap stock indicesvis-à-visthe performance of ETFs tracking indices comprised of small-cap stocks.