Reassessing Small-Cap Stocks
Is it time to rethink what we consider small-cap stocks? Are there even genuine small-cap stocks available in public markets anymore? In a recent episode of ETF Zoo, a discussion unfolded featuring Dave Nadig, President and Research Director at ETF.com, and Senior ETF Analyst Sumit Roy. They were joined by Eric Balchunas from Bloomberg Intelligence and Elizabeth Kashner, Director of Global Research Funds at FactSet. The group tackled small-cap performance and the emergence of unicorns in the market.
A Surge in Small-Cap Stocks
Nadig remarked, “Eric, I want to delve into a chart you referenced. Despite all the news disruptions, the market seems to remain steady and is actually progressing.” He reflected on missed opportunities from previous discussions about the comeback of small-cap value stocks. Interestingly, he pointed out that the Vanguard small-cap value has nearly reached an all-time high, a notable achievement after a prolonged period of stagnation. “Is this finally the moment for small-cap stocks?” he asked.
In response, Balchunas shared that the Avantis small-cap value fund is currently outperforming the S&P 500. While it may not hold true that small-cap stocks outshine their larger counterparts, he emphasized that, with careful selection, small caps can still be lucrative. “It’s not about being inferior; large caps just tend to perform better overall,” he added.
He also touched on the shifts in small-cap dynamics, suggesting that private companies might actually represent the new generation of small-cap stocks. “It takes quite a while for them to become public,” Balchunas said. “So if you’re looking to catch rising stars before they mature, the traditional small-cap market might not offer much.” There are still a few promising stocks, but many are effectively sidelined or underperforming.
Nadig noted the cyclical nature of small-cap stocks, observing that market flows come irregularly, creating a frustrating wait for some investors. He compared it to a perpetual search for a return to the glory days of the early 2000s, where small caps dominated for a decade.
The Role of Private Markets
Shifting the conversation, Nadig posed a thought about how we perceive efficiency in the market, specifically referencing companies like SpaceX. “What happens when companies like this go public? They might become larger than expected, almost immediately seeking index inclusion. Is this the right approach?” he questioned.
Upholding the discussion, Kashner agreed, urging for consensus on the matter. Roy added that, while private markets might have stood in for small-cap representation a few years ago, they have diverged significantly now.
Balchunas pointed out that newer, larger companies, such as Meta, emerged from this shift, complicating the small-cap landscape further. He suggested that SpaceX might revitalize interest in IPOs, leaving SPACs behind.
Moreover, Nadig reminisced about a time when going public was a genuine way to raise capital for growth, not just a financial exit. It raised the question of whether that approach can be revived.
Roy concluded that many investors share a desire to invest early in promising companies, but the allure and scale of the private market often diminish the need for public offerings.
